Spring Real Estate Investment Trust

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2 IMPORTANT: If you are in any doubt about the contents of this Offering Circular, you should seek independent professional financial advice. Spring Real Estate Investment Trust (a Hong Kong collective investment scheme authorized under section 104 of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)) Managed by Spring Asset Management Limited GLOBAL OFFERING Number of Units under the Global Offering : 439,500,000 (comprising 341,500,000 Sale Units to be sold by the Selling Unitholder and 98,000,000 New Units to be issued and offered by Spring REIT and subject to the Over-allotment Option) : 43,950,000 (comprising New Units to be issued and offered by Spring REIT and subject to reallocation) : 395,550,000 (comprising 341,500,000 Sale Units to be sold by the Selling Unitholder and 54,050,000 New Units to be issued and offered by Spring REIT and subject to reallocation and the Overallotment Option) Maximum Offer Price : HK$4.03 per Unit payable in full on application in Hong Kong dollars, plus brokerage of 1.0%, Hong Kong Stock Exchange trading fee of 0.005% and SFC transaction levy of 0.003% (payable in full on application in Hong Kong dollars and subject to refund) Stock Code : Number of Units under the Hong Kong Public Offering Number of Units under the International Offering Sole Global Coordinator and Listing Agent Joint Bookrunners and Joint Lead Managers The Securities and Futures Commission of Hong Kong, Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited take no responsibility for the contents of this Offering Circular, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Offering Circular. The Offer Price is expected to be determined by agreement between the Sole Global Coordinator (on behalf of the Underwriters), RCA Fund and the REIT Manager on the Price Determination Date. The Price Determination Date is expected to be on or about Friday, November 29, The Offer Price will not be more than HK$4.03 and is currently expected to be not less than HK$3.81. The Sole Global Coordinator (on behalf of the Underwriters), with the consent of RCA Fund and the REIT Manager, may reduce the number of Units being offered under the Global Offering and/or the Offer Price range below that stated in this Offering Circular (which is HK$3.81 to HK$4.03 per Unit) at any time on or prior to the morning of the last day for lodging applications under the Hong Kong Public Offering. In such a case, an announcement will be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) and on the websites of Spring REIT at and the Hong Kong Stock Exchange at not later than the morning of the last day for lodging applications under the Hong Kong Public Offering. Before submitting applications for the Hong Kong Public Offering Units, applicants under the Hong Kong Public Offering should note that applications cannot be withdrawn once submitted. However, if the number of Units being offered under the Global Offering and/or the Offer Price range is reduced, applicants under the Hong Kong Public Offering will be entitled to withdraw their applications unless positive confirmations from the applicants to proceed with their applications are received. Further details are set forth in the sections headed Structure of the Global Offering and How to Apply for Hong Kong Public Offering Units in this Offering Circular. The Units have not been and will not be registered under the U.S. Securities Act or any state securities law in the United States. The Units are being offered and sold only outside the United States in offshore transactions in accordance with Regulation S under the U.S. Securities Act. Prior to making an investment decision, prospective investors should consider carefully all of the information set out in this Offering Circular, including the risk factors set out in the section headed Risk Factors in this Offering Circular. The obligations of the Hong Kong Underwriters under the Hong Kong Underwriting Agreement are subject to termination by the Sole Global Coordinator (on behalf of the Hong Kong Underwriters) if certain grounds arise prior to 8:00 a.m. on the Listing Date. Such grounds are set out in the section headed Underwriting in this Offering Circular. It is important that you refer to that section for further details. November 25, 2013

3 EXPECTED TIMETABLE (1) Hong Kong Public Offering commences and WHITE and YELLOW Application Forms available from... Latest time to complete electronic applications under the White Form eipo service through the designated website at (2)... Application lists open (3)... Latest time to (a) lodge WHITE and YELLOW Application Forms, (b) complete payment for White Form eipo applications by effecting Internet banking transfer(s) or PPS payment transfer(s) and (c) give electronic application instructions to HKSCC... Application lists close (3)... Expected Price Determination Date... (1) Announcement of the Offer Price, the level of indications of interest in the International Offering, the results of applications in the Hong Kong Public Offering and the basis of allocations of the Hong Kong Public Offering Units to be published in the South China Morning Post (in English) and the Hong Kong Economic Times (in Chinese) on or before... (2) Results of allocations in the Hong Kong Public Offering to be available through a variety of channels as described in the section headed How to Apply for Hong Kong Public Offering Units Publication of Results in this Offering Circular from... (3) Announcement containing (1) and (2) above to be published on the websites of Spring REIT at and the Hong Kong Stock Exchange at respectively, from... Dispatch of Unit certificates and White Form e-refund payment instructions/refund cheques on or before (4)... Dealings in the Units on the Hong Kong Stock Exchange expected to commence on... 9:00 a.m. on Monday, November 25, :30 a.m. on Thursday, November 28, :45 a.m. on Thursday, November 28, :00 noon on Thursday, November 28, :00 noon on Thursday, November 28, 2013 Friday, November 29, 2013 Wednesday, December 4, 2013 Wednesday, December 4, 2013 Wednesday, December 4, 2013 Wednesday, December 4, 2013 Thursday, December 5, 2013 Notes: (1) All dates and times refer to Hong Kong dates and times. i

4 EXPECTED TIMETABLE (1) (2) You will not be permitted to submit your application through the designated website at after 11:30 a.m. on the last day for submitting applications. If you have already submitted your application and obtained an application reference number from the designated website prior to 11:30 a.m., you will be permitted to continue the application process (by completing payment of the application monies) until 12:00 noon on the last day for submitting applications, when the application lists close. (3) If there is a black rainstorm warning signal or a tropical cyclone warning signal number 8 or above in force in Hong Kong at any time between 9:00 a.m. and 12:00 noon on Thursday, November 28, 2013, the application lists will not open and close on that day. Please see the section headed How to Apply for Hong Kong Public Offering Units Effect of Bad Weather on the Opening and Closing of the Application Lists in this Offering Circular for further information. (4) Unit certificates for the Hong Kong Public Offering Units are expected to be issued on Wednesday, December 4, 2013, but will only become valid if the Global Offering has become unconditional in all respects at any time prior to 8:00 a.m. on the Listing Date, which is expected to be Thursday, December 5, Investors who trade Units on the basis of publicly available allocation details or prior to the receipt of the Unit certificates or prior to the Unit certificates becoming valid do so entirely at their own risk. For details of the structure of the Global Offering, including its conditions and the procedures for applications for Hong Kong Public Offering Units, see the sections headed Structure of the Global Offering and How to Apply for Hong Kong Public Offering Units in this Offering Circular, respectively. ii

5 CONTENTS Expected Timetable... i Contents... iii Key Investment Information... v Offering Circular Summary... 1 The Global Offering Information about this Offering Circular and the Global Offering Parties Involved in the Global Offering Risk Factors Use of Proceeds Ownership of and Interest in Units Distribution Policy Investment Highlights Strategy The Property and Business Financial Information and Forecasts Selected Financial Information Management s Discussion and Analysis of Financial Condition and Results of Operations Management s Discussion and Analysis of Future Financial Condition and Results of Operations Profit Forecast Statement of Distributions Unaudited Pro Forma Statement of Financial Position Industry Overview Structure, Management and Agreements Reorganization, Structure and Organization of Spring REIT The REIT Manager The Property Manager and the Building Manager Information about RCA Fund Corporate Governance The Trust Deed and Related Matters Material Agreements and Other Documents Relating to Spring REIT Connected Party Transactions Modifications, Waivers and Licensing Conditions Other Information Taxation Underwriting Structure of the Global Offering Experts How to Apply for Hong Kong Public Offering Units Definitions Technical Terms General Terms iii Page

6 CONTENTS Appendices Appendix I Accountant s Report... I-1 Appendix II Unaudited Pro Forma Statements of Financial Position of Spring REIT... II-1 Appendix III Letters in Relation to the Profit Forecast... III-1 Appendix IV Independent Property Valuer s Valuation Report... IV-1 Appendix V Letter from the Property Consultant in Relation to its Building Condition Survey Summary Report... V-1 Appendix VI Overview of the Relevant Laws and Regulations in the PRC and Comparison of Certain Aspects of its Property Laws and the Laws of Hong Kong... VI-1 Appendix VII General Information... VII-1 Page iv

7 KEY INVESTMENT INFORMATION v

8 OFFERING CIRCULAR SUMMARY The following summary is derived from, and should be read in conjunction with, the full text of this Offering Circular. This section is only a general summary of the more detailed information contained elsewhere in this Offering Circular. You should read carefully the entire Offering Circular to understand Spring REIT s business, statement of distributions, the rights attached to the Units, and tax and other considerations that may be important to your decision whether to invest in the Units. As an investment in the Units involves risks, you should pay particular attention to the section headed Risk Factors in this Offering Circular. In making your investment decision, you should rely only on the information contained in this Offering Circular. None of Spring REIT, the REIT Manager, the Trustee, RCA Fund, AD Capital, the Underwriters, the Listing Agent, any of their respective directors, agents, employees or advisors or any other persons involved in the Global Offering has authorized anyone to provide you with any information or make any representation that is different from that contained in this Offering Circular. Statements contained in this summary that are not historical facts may be forward-looking statements based on certain reasonable assumptions, expectations and beliefs of the REIT Manager. You are cautioned that there are certain risks and uncertainties associated with Spring REIT and the actual results may differ materially from those projected by such forward-looking statements. A REIT AS AN INVESTMENT VEHICLE A REIT is a collective investment scheme constituted as a unit trust that invests primarily in income-producing real estate assets and uses the income to provide stable returns to its unitholders. Holding units in a REIT allows investors to share the benefits and risks of owning the real estate assets held by the REIT. An investment in the units of a REIT in Hong Kong is governed primarily by the REIT Code and also the trust deed constituting the REIT and offers investors the following benefits: certainty as to business focus of the REIT, as a REIT does not have the discretion to diversify outside of the real estate sector or to own significant non-real estate assets; a distribution which is required by the REIT Code to be at least 90% of the REIT s audited net income after tax for each financial year, subject to certain adjustments; significantly enhanced liquidity in comparison to direct investments in real estate; a REIT manager licensed and regulated on an ongoing basis by the SFC; and a corporate governance framework, compliance with which is overseen by an independent trustee. OVERVIEW OF SPRING REIT Spring REIT is a real estate investment trust formed primarily to own and invest in high quality income-producing real estate assets in Asia. The key objectives of the REIT Manager for Spring REIT are to provide Unitholders with stable distributions and the potential for sustainable long-term growth in the distributions and enhancement in the value of the real estate assets. 1

9 OFFERING CIRCULAR SUMMARY Spring REIT is the first REIT to offer investors direct exposure to two Premium Grade office buildings strategically located in the CBD of Beijing. Spring REIT will initially invest in and own the Property through its ownership of RCA01. The Property comprises all of the office floors of Office Tower 1 (including Levels 4 to 28, and the equipment and emergency shelter floor on Level 16, which contains no lettable space) and Office Tower 2 (including Levels 4 to 32, and the equipment and emergency shelter floor on Level 20, which contains no lettable space) in China Central Place and a total of approximately 600 car parking spaces located in the underground levels of the two office buildings. The Property has a total of 120,245 sq.m. of office space and 25,127 sq.m. of car parking spaces. Construction of the Property commenced in March 2004 and was completed in December KEY INVESTMENT HIGHLIGHTS OF SPRING REIT The REIT Manager believes that Spring REIT presents Unitholders with an attractive investment proposition: Exposure to Premium Grade office buildings located in the CBD of Beijing; The Property is able to benefit from being part of China Central Place ( ), a prime mixed-use complex in Beijing and a well recognized brand; High occupancy rates and a diverse and high quality tenant base at the Property; Attractive distribution prospects supported by organic growth; and Transparent and professional management by a highly experienced management team with a proven track record. For further details, see the section headed Investment Highlights in this Offering Circular. OBJECTIVES AND INVESTMENT STRATEGIES OF SPRING REIT The key objectives of the REIT Manager for Spring REIT are to provide Unitholders with stable distributions and the potential for sustainable long-term growth in the distributions and enhancement in the value of the real estate assets. The REIT Manager intends to accomplish these objectives through holding and investing in high quality income-producing real estate assets in mainland China, although future acquisitions may also be made in Hong Kong, Macau, Taiwan, Japan and other areas of Asia. The implementation of the REIT Manager s strategy can be broadly categorized as follows: Asset Management Strategy. The REIT Manager intends to actively manage Spring REIT s property portfolio to maximize long-term value, maintain high occupancy rates, increase lease renewal rates and maintain a high quality tenant base. The REIT Manager will work closely with both the Property Manager and the Building Manager to drive organic growth and maintain strong relationships with tenants. 2

10 OFFERING CIRCULAR SUMMARY Acquisition Strategy. The REIT Manager intends to seek to selectively acquire additional high quality income-producing real estate that meets its investment criteria. Capital and Risk Management Strategy. The REIT Manager intends to focus on maximizing the returns on the portfolio and distributions to Unitholders, while maintaining an appropriate loan-to-value ratio. For further details, see the section headed Strategy in this Offering Circular. SUMMARY INFORMATION ON THE PROPERTY Description The Property comprises all of the office floors of Office Tower 1 (including Levels 4 to 28, and the equipment and emergency shelter floor on Level 16, which contains no lettable space) and Office Tower 2 (including Levels 4 to 32, and the equipment and emergency shelter floor on Level 20, which contains no lettable space) in China Central Place and a total of approximately 600 car parking spaces located in the underground levels of the two office buildings. The Property is located at No. 79 and No. 81, Jianguo Road ( ), Chaoyang District, Beijing, China Year of Completion December 2006 Number of Car Parking Spaces Approximately 600 car parking spaces Total GFA 145,373 sq.m., comprising the Total Office GFA of 120,245 sq.m. and car parking GFA of 25,127 sq.m. Appraised Value (As of August 31, 2013) RMB7,747 million Number of Tenants 125 tenants under 174 leases (As of June 30, 2013) Land Use Rights 50 years expiring on October 28, 2053 Building Ownership Certificates FINANCIAL AND OPERATIONAL INFORMATION Tenant Mix RCA01 has valid building ownership certificates for the Property, comprising 120,245 sq.m. of office space and 25,127 sq.m. of car parking spaces The Property has a diverse and high quality tenant base with a total of 125 tenants under 174 leases as of June 30, A significant number of these tenants are leading multi-national and domestic companies, which include Deutsche Bank, Condé Nast, NBA, Tesco, SAP AG, White & Case LLP, Zhong De Securities, Global Law Office, Aecom, Itochu, Brasil Embraer, Baxter, Richemont and Bain & Company. The tenants are also in a wide variety of industry sectors, including finance, insurance, professional services, education, media, sport, energy, technology and health care. They represent a balance of international and domestic organizations. 3

11 OFFERING CIRCULAR SUMMARY The following table sets forth information on the five largest tenants of the Property in terms of Office GFA as of June 30, 2013: Tenant Expiration date(s) Office GFA Percentage of Total Office GFA (sq.m.) (%) Deutsche Bank and its affiliated companies... November 2013 (1) 7, SAPAG... March , Condé Nast... January , Zhong De Securities... April , Global Law Office... June , Total... 25, Note: (1) The lease with Deutsche Bank and its affiliated companies expires on November 30, As of the Latest Practicable Date, the Property Manager is in the process of renewing this lease. Other than Deutsche Bank and Zhong De Securities, which are connected persons of Spring REIT as a result of their relationships with the Trustee, none of the other three largest tenants in terms of Office GFA are connected persons of Spring REIT. Occupancy and Unit Rent The following table sets forth information on the average Office Occupancy Rate, average Unit Rent of new/renewed leases and average leased Unit Rent for the periods indicated: Average Office Occupancy Rate (1) Average Unit Rent of New/Renewed Leases (2) Average Leased Unit Rent (3) (%) (RMB) (RMB) Year ended December 31, Year ended December 31, Year ended December 31, Six months ended June 30, Notes: (1) The average Office Occupancy Rate over the relevant period is derived by dividing the sum of the occupancy rates as of the end of each month during the relevant period by the number of months in the relevant period. (2) The average Unit Rent of new/renewed leases over the relevant period is calculated as the weighted average of the Unit Rent for lease agreements, the performance of which commences during a relevant period. (3) The average leased Unit Rent is calculated as the weighted average of the Unit Rent for lease agreements that are being performed during a relevant period. 4

12 OFFERING CIRCULAR SUMMARY OVERVIEW OF SPRING REIT S STRUCTURE The following diagram depicts the ownership structure of Spring REIT and the Property, and the primary structural and contractual relationships between Spring REIT, the Unitholders, the REIT Manager, the Trustee and the Property Manager upon completion of the Global Offering (before any exercise of the Over-allotment Option). Unitholders AD Capital (5) RCA Fund (4) 60.0% Public Unitholders 40.0% 100% Distributions REIT Manager Management fee Management services (1) Spring REIT 100% Trustee fee Holds assets of Spring REIT on trust for Unitholders Trustee Dividends 40% Supervision (3) RCA01 (6) Property Manager (7) Property management fee Lease, building and cash management services (2) 100% Property Outside the PRC In the PRC Legend: Payments and services pursuant to certain contractual relationships Distributions/dividends ownership/holding Notes: (1) The REIT Manager will provide management services to Spring REIT and will receive a management fee from Spring REIT. Please refer to the section headed The REIT Manager Fees, Costs and Expenses of the REIT Manager in this Offering Circular for further details. (2) The Property Manager provides lease management, building management and cash management services to RCA01 pursuant to the Property Management Agreement and receives a property management fee. Please refer to the section headed The Property Manager and the Building Manager Property Management Agreement in this Offering Circular for further details. (3) The Property Management Supervision Agreement was entered into by the REIT Manager, the Trustee, RCA01, AD Capital and AD Capital Beijing. Please refer to the section headed Material Agreements and Other Documents Relating to Spring REIT Property Management Supervision Agreement in this Offering Circular for further details. (4) RCA Fund is an exempted limited partnership established in the Cayman Islands. As of the Latest Practicable Date, the sole general partner of RCA Fund was RCAC, a Cayman Islands exempted company. 5

13 OFFERING CIRCULAR SUMMARY The management, control, operation of and the determination of the policy with respect to RCA Fund and its investments are exclusively vested in RCAC. For further details, see the section headed Information About RCA Fund in this Offering Circular. (5) AD Capital is a private equity investment firm owned by DBJ, Asuka Asset Management Co., Ltd. and certain minority management shareholders. AD Capital is principally engaged in investing in companies and projects in growth sectors in Japan, China and other parts of Asia and it has made selective investments in real estate. AD Capital also provides management services to RCA Fund pursuant to a management agreement between AD Capital and RCA Fund (acting through its general partner, RCAC). (6) RCA01 is an exempted company with limited liability registered in the Cayman Islands. Other than holding the Property, RCA01 has no other business operations or employees. (7) There will be no change in the ownership structure of the Property Manager as a result of the Reorganization referred to in the section headed Reorganization, Structure and Organization of Spring REIT Reorganization in this Offering Circular. As of the Latest Practicable Date, RCA Fund owned all of the issued preference shares in RCA01 while MaplesFS owned all of the issued ordinary shares in RCA01. In preparation for the Global Offering, as one of the reorganization steps to take place prior to the Listing Date, RCA Fund will acquire all of the issued ordinary shares in RCA01 from MaplesFS and, thereafter, reclassify all of the issued preference shares in RCA01 held by RCA Fund as ordinary shares in RCA01 prior to Completion. Accordingly, RCA Fund will then be the sole shareholder of RCA01, holding all of the issued ordinary shares in RCA01 prior to Completion. Pursuant to the Reorganization, RCA Fund will transfer all of the ordinary shares in RCA01 to the Trustee (in its capacity as trustee of Spring REIT) in exchange for the issue of 1,000,000,000 Units to RCA Fund. Please see the section headed Reorganization, Structure and Organization of Spring REIT Reorganization in this Offering Circular for details. THE REIT MANAGER The REIT Manager, Spring Asset Management Limited, was incorporated in Hong Kong under the Companies Ordinance on January 29, The REIT Manager is wholly owned by AD Capital, which is a private equity investment firm established as a joint venture among DBJ, a financial institution wholly owned by the Government of Japan, Asuka Asset Management Co., Ltd., one of the major alternative asset management firms in Japan, and certain minority management shareholders. AD Capital is principally engaged in investing in companies and projects in growth sectors in Japan, China and other parts of Asia and it has made selective investments in real estate. AD Capital also provides management services to RCA Fund pursuant to a management agreement between AD Capital and RCA Fund (acting through its general partner, RCAC). The REIT Manager is licensed by the SFC to conduct the regulated activity of asset management. The REIT Manager is responsible for the management of Spring REIT and ensuring compliance with the applicable provisions of the REIT Code, the SFO and other relevant legislation, the Listing Rules, the Trust Deed and all relevant contracts. See the section headed The REIT Manager in this Offering Circular for further details on the REIT Manager. THE TRUSTEE The trustee of Spring REIT is DB Trustees (Hong Kong) Limited. The Trustee is an indirect wholly owned subsidiary of Deutsche Bank AG. The Trustee is a company incorporated in Hong Kong and registered as a trust company under section 77 of the Trustee Ordinance. The Trustee is qualified to act as a trustee of collective investment schemes authorized under the SFO pursuant to the REIT Code. 6

14 OFFERING CIRCULAR SUMMARY For details of the Trustee s obligations under the Trust Deed and the REIT Code, see the section headed The Trust Deed and Related Matters in this Offering Circular. THE PROPERTY MANAGER The Property Manager is Beijing Hua-re Real Estate Consultancy Co., Ltd. As of the Latest Practicable Date, the Property Manager was owned by AD Capital, Langfang Development Zone Hua-kun Information Consultancy Co., Ltd. ( ) and Langfang Development Zone Xinhua Jiaye Investment Consultancy Co., Ltd. ( ) as to 40.0%, 40.0% and 20.0%, respectively. The Property Manager has been appointed as an agent of RCA01 to conduct the dayto-day operation and management of the Property under the Property Management Agreement. The Property Manager receives, on a monthly basis, 2.0% of the total monthly revenue of the Property for providing lease management, building management and cash management services in respect of the Property. For details of the Property Manager s services, see the sections headed The Property and Business Lease Management and Lease Agreements and The Property Manager and the Building Manager The Property Management Agreement in this Offering Circular. For further information on the Property Manager, see the section headed The Property Manager and the Building Manager in this Offering Circular. CORPORATE GOVERNANCE With the objectives of establishing and maintaining high standards of corporate governance, certain policies and procedures have been put in place to promote the operation of Spring REIT in a transparent manner and with built-in checks and balances. The Trustee and the REIT Manager are independent of each other, with their respective roles in relation to Spring REIT set out in the REIT Code and the Trust Deed. The REIT Manager is required by the REIT Code to act in the best interests of the Unitholders, to whom the Trustee also owes fiduciary duties. The Board comprises seven members, three of whom are independent non-executive Directors. Policies and procedures have been established for, among other things, monitoring and supervising dealings in Units by the Directors and the REIT Manager. For further details, see the section headed Corporate Governance in this Offering Circular. SUMMARY FINANCIAL INFORMATION The following tables set forth summary financial information on a historical basis for RCA01. The summary statements of comprehensive income and cash flows for each of the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and 2013 and the statements of financial position as of December 31, 2010, 2011 and 2012 and June 30, 2013 have been derived from RCA01 s financial information and related notes thereto, which have been included in Appendix I to this Offering Circular. The financial information as of and for the years ended December 31, 2010, 2011 and 2012 and the six 7

15 OFFERING CIRCULAR SUMMARY months ended June 30, 2013 and the related notes thereto have been prepared in accordance with IFRS and have been audited by PricewaterhouseCoopers, the reporting accountant. The statements of comprehensive income and cash flows for the six months ended June 30, 2012 have been derived from RCA01 s unaudited financial information and related notes thereto, which have been included in Appendix I to this Offering Circular. The summary financial information for RCA01 included below and set forth in Appendix I to this Offering Circular is not indicative of Spring REIT s future performance. You should read the following selected financial information together with the sections headed The Property and Business, Management s Discussion and Analysis of Financial Condition and Results of Operations and Unaudited Pro Forma Statement of Financial Position in this Offering Circular and the historical financial information of RCA01 and related notes thereto set forth in Appendix I to this Offering Circular. For a discussion of Spring REIT s future financial condition and results of operations, see the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations in this Offering Circular. 8

16 OFFERING CIRCULAR SUMMARY Statements of Comprehensive Income Six months ended Year ended December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (unaudited) Revenues... 37,191 44,692 52,903 24,829 30,510 Operating expenses... (11,691) (12,425) (13,630) (6,468) (7,755) General and Administrative expenses... (272) (303) (226) (67) (2,037) Increase in fair value of an investment property , , , ,356 45,912 Other losses, net... (13,777) (1,025) (7,520) (3,749) (5,158) Operating profit , , , ,901 61,472 Finance income Finance costs (1)... (34,498) (5,977) (27,575) (15,846) (9,394) Profit for the year/period... 99, , , ,223 52,266 Other comprehensive income/(loss) Exchange gain/(loss) on translation of financial statements... 5,527 15,481 1,838 (1,864) 10,778 Total comprehensive income for the year/period , , , ,359 63,044 Note: (1) Please see Note 9 to the Accountant s Report set out in Appendix I to this Offering Circular for more information on finance costs. 9

17 OFFERING CIRCULAR SUMMARY Statements of Financial Position As of As of December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 ASSETS Non-current assets Investment property , ,509 1,186,859 1,253,500 Derivative financial instruments... 6,443 4,613 2, , ,122 1,186,859 1,255,543 Current assets Trade and other receivables... 3,113 1,309 1,817 2,693 Amount due from redeemable preference shareholders (1)... 11,983 25,466 29,080 Restricted bank balances... 30,256 34,782 36,955 55,916 Cash and cash equivalents... 5,927 2,099 12,076 20,675 51,279 63,656 79,928 79,284 Total assets ,336 1,061,778 1,266,787 1,334,827 EQUITY Capital and reserves Ordinary shares... Redeemable preference shares (2) , , , ,934 Retained earnings , , , ,697 Exchange reserves... 5,527 21,008 22,846 33,624 Total equity , , , ,255 LIABILITIES Non-current liabilities Long-term borrowings , , ,535 Current liabilities Rental deposits... 12,446 14,622 16,652 19,314 Receipts in advance, accruals and other payables... 7,333 5,371 6,914 11,723 Current portion of long-term borrowings ,174 19,779 19, ,740 31,037 Total liabilities , , , ,572 Total equity and liabilities ,336 1,061,778 1,266,787 1,334,827 Net current assets / (liabilities)... 31,500 43,663 (420,812) 48,247 Total assets less current liabilities ,557 1,041, ,047 1,303,790 Notes: (1) This receivable represents the asset management fee paid by RCA01 on behalf of RCA Fund to AD Capital. The receivable was offset by a dividend payable on June 28, (2) The preference shares in RCA01 will be reclassified as ordinary shares prior to Completion. 10

18 OFFERING CIRCULAR SUMMARY Statements of Cash Flows Six months ended Year ended December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (unaudited) Net cash generated from operating activities... 31,463 34,575 39,509 18,947 27,063 Net cash used in investing activities... (3,862) (12,552) (3,535) (2,834) (3,234) Net cash used in financing activities... (21,675) (25,851) (25,998) (11,095) (15,232) Net increase/(decrease) in cash and cash equivalents... 5,926 (3,828) 9,976 5,018 8,597 Cash and cash equivalents at beginning of the year/period ,927 2,099 2,099 12,076 Exchange gains on cash and cash equivalents Cash and cash equivalents at end of the year/period... 5,927 2,099 12,076 7,117 20,675 PROFIT FORECAST FOR THE PERIOD FROM THE LISTING DATE TO DECEMBER 31, 2013 The REIT Manager forecasts that, in the absence of unforeseen circumstances and on the bases and assumptions set out in the section headed Profit Forecast Bases and Assumptions in this Offering Circular, the profit attributable to Unitholders and the Annual Distributable Income of Spring REIT for the period from the Listing Date to December 31, 2013 (being the Profit Forecast Period) will be not less than US$1.2 million and US$2.1 million, respectively. The profit forecast assumes that the anticipated Listing Date will be December 5, 2013 and will vary if the actual Listing Date is different. 11

19 OFFERING CIRCULAR SUMMARY For the Profit Forecast Period US$ 000 Revenue Rental income... 5,103 Car park income Other income ,143 Operating expenses Property management fee... (103) Property taxes... (284) Business tax and other taxes... (301) Withholding tax... (514) Insurance... (13) Leasing commissions... (71) Others... 0 (1,286) General and administrative expenses Asset management fee... 0 Professional fee... (45) (45) Trust and IPO-related expenses REIT Manager s fee... (419) Trustee fees and other trust expenses... (201) (620) Increase in fair value of investment property (1)... 0 Other losses, net... (59) Operating profit... 3,133 Finance income Finance costs... (1,958) Profit for the period... 1,197 Distribution data: Profit for the period... 1,197 Adjustments (2) Distributable income for the Profit Forecast Period... 2,088 For the Profit Forecast Period Minimum Offer Price Maximum Offer Price Offer price (HK$) Assumed number of Units outstanding as of December 31, 2013 for the Profit Forecast Period (in millions) (3)... 1,099 1,099 Forecast distribution per Unit ( DPU ) (HK$) Annualized DPU (HK$) Forecast annualized distribution yield (4) % 4.94% 12

20 OFFERING CIRCULAR SUMMARY Notes: (1) The forecast valuation of the investment property held by the Spring REIT (being the Property) as of the Listing Date and December 31, 2013 is based on the Appraised Value of the Property by the Independent Property Valuer as of August 31, The REIT Manager forecasts that there will be no material change in the fair value of investment property in the Profit Forecast Period. (2) Adjustments are made to add back (i) US$59,000 in respect of the losses in fair value of derivative financial instruments, (ii) US$335,000 in respect of the portion of the REIT Manager s fee to be paid in the form of Units, and (iii) US$497,000 in respect of the non-cash loan arrangement fees amortized under finance costs. (3) For the purpose of calculating the DPU of the Units held by Unitholders as of December 31, 2013 for the FY2013 Distribution Period set forth in the table above, it is assumed the number of Units issued and outstanding remains unchanged, and includes the estimated number of Units to be issued as the REIT Manager s fee of approximately 644,000 Units based on the Maximum Offer Price and approximately 681,000 Units based on the Minimum Offer Price for the Profit Forecast Period. (4) The annualized forecast distribution yields are provided for illustrative purposes only. The annualized actual distribution yield may differ from the annualized forecast distribution yields based on the forecast DPU for the Profit Forecast Period. The annualized forecast distribution yields have been calculated with reference to the Minimum Offer Price and Maximum Offer Price only. Such yields will vary for investors who purchase Units in the secondary market at a market price that differs from the Minimum Offer Price and the Maximum Offer Price or for investors who do not hold Units for the entire Profit Forecast Period. HEDGING STRATEGIES RCA01 has in the past entered into currency options to economically hedge bank borrowings denominated in U.S. dollars and plain vanilla interest rate caps to economically hedge the interest rate risk arising from bank borrowings as part of its financial risk management, but did not account for these as accounting hedges under IAS 39. As of the date of this Offering Circular, RCA01 has outstanding plain vanilla interest rate caps entered into in February 2013 to economically hedge the interest rate risk arising from the Term Loan Facility with principal amount of US$515 million. For more information on the hedging transactions RCA01 has entered into, please see the section headed Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure about Market Risk in this Offering Circular. Apart from the plain vanilla interest rate caps entered into in February 2013, the REIT Manager currently does not have any immediate plans to enter into any other hedging transactions. 13

21 OFFERING CIRCULAR SUMMARY CERTAIN FEES AND CHARGES The following is a summary of certain fees and charges payable by Spring REIT in connection with the establishment and ongoing management of Spring REIT: Payable by Spring REIT Amount Payable (a) REIT Manager s fee (1) Base Fee 0.4% per annum of the value of the Deposited Property. Variable Fee 3.0% per annum of the Net Property Income (before deduction therefrom of the Base Fee and Variable Fee). Acquisition Fee Not exceeding the rate of 1.0% (and being 1.0% as of the date of the Trust Deed) of the acquisition price of each real estate asset (other than the Property) acquired by Spring REIT. Divestment Fee Not exceeding the rate of 0.5% (and being 0.5% as of the date of the Trust Deed) of the sale price of each real estate asset sold by Spring REIT. (b) Trustee s fee Currently 0.015% to 0.025% per annum of the value of the Deposited Property payable semiannually or quarterly in arrears, which may be adjusted from time to time but subject to a minimum of RMB56,000 per month and a maximum cap of 0.06% per annum of the value of the Deposited Property. Based on the value of the Deposited Property of approximately RMB7,747 million as of August 31, 2013, the rate of the Trustee s fee in respect of the Property would be 0.02% per annum. Spring REIT will also pay to the Trustee a one-time inception fee of HK$180,000. The Trustee may also charge Spring REIT additional fees on a time-cost basis at a rate to be agreed with the REIT Manager from time to time if the Trustee were to undertake duties that are of an exceptional nature or otherwise outside the scope of its normal duties in the ordinary course of normal day-to-day business operation of Spring REIT, such as acquisition or divestment of investments by Spring REIT after the IPO. (c) Property management fee (payable to the Property Manager) 2.0% monthly of the total monthly revenues of the Property. Note: (1) The REIT Manager may elect at its sole discretion to receive, in whole or in part, the Base Fee and/or the Variable Fee in cash or in the form of Units. If no election is made, the Base Fee and the Variable Fee will be paid in cash. The Acquisition Fee or the Divestment Fee will be paid to the REIT Manager in the form of cash or, at the election of the REIT Manager, in whole or in part in the form of Units. 14

22 OFFERING CIRCULAR SUMMARY The following is a summary of certain fees and charges payable by Unitholders, in HK$, in connection with the subscription or purchase of Units in the Global Offering: Payable by Unitholders directly Amounts Payable (1) Brokerage % of Maximum Offer Price Hong Kong Stock Exchange trading fee % of Maximum Offer Price SFC transaction levy % of Maximum Offer Price Note: (1) Subject to refund if the Offer Price is lower than the Maximum Offer Price. RISK FACTORS There are risks associated with any investment. Some of the particular risks in investing in the Units are set out in the section headed Risk Factors in this Offering Circular. Investors should read that entire section carefully before they decide to invest in the Units. 15

23 THE GLOBAL OFFERING Spring REIT Spring Real Estate Investment Trust is a collective investment scheme constituted as a unit trust by the Trust Deed and authorized under section 104 of the SFO. The REIT Manager Spring Asset Management Limited, which is wholly owned by AD Capital, a private equity investment firm owned by DBJ, Asuka Asset Management Co., Ltd. and certain minority management shareholders. The Trustee The Selling Unitholder The Global Offering The Hong Kong Public Offering The International Offering DB Trustees (Hong Kong) Limited. RCA Fund, which is an exempted limited partnership established in the Cayman Islands. AD Capital provides management services to RCA Fund pursuant to a management agreement between AD Capital and RCA Fund (acting through its general partner, RCAC). An initial offer of 439,500,000 Units under the Hong Kong Public Offering and the International Offering, comprising 341,500,000 Sale Units to be sold by the Selling Unitholder and 98,000,000 New Units to be issued and offered by Spring REIT, subject to the Over-allotment Option. An initial offer of 43,950,000 New Units to be issued and offered by Spring REIT to the public in Hong Kong (subject to reallocation). An initial offer of an aggregate of 395,550,000 Units (comprising 341,500,000 Sale Units to be sold by the Selling Unitholder and 54,050,000 New Units to be issued and offered by Spring REIT, and subject to reallocation and the exercise of the Over-allotment Option) solely to institutional, professional and other investors outside the United States in offshore transactions in reliance on Regulation S, subject to the terms and conditions described in this Offering Circular. Over-allotment Option The International Underwriters are expected to be granted an Over-allotment Option by the Selling Unitholder pursuant to the International Underwriting Agreement, exercisable in full or in part, on one or more occasions from the Listing Date until 30 days after the last day for lodging applications under the Hong Kong Public Offering to require the Selling Unitholder to sell up to an aggregate of 65,925,000 Sale Units at the Offer Price to, among other things, cover over-allocations in the International Offering, if any. The exercise of the Over-allotment Option will not increase the total number of Units outstanding upon completion of the Global Offering. The total number of Sale Units subject to the 16

24 THE GLOBAL OFFERING Over-allotment Option will constitute not more than 15% of the total number of Units initially available under the Global Offering. Reallocation of Units Offer Price Range The Units to be offered in the Hong Kong Public Offering and the International Offering may, in certain circumstances, be reallocated between these offerings. See the section headed Structure of the Global Offering in this Offering Circular. The Offer Price of the Units will not be more than HK$4.03 and is currently expected to be not less than HK$3.81. Charges Payable by Investors In addition to the Maximum Offer Price, investors applying for Units in the Global Offering must pay brokerage of 1.0%, Hong Kong Stock Exchange trading fee of 0.005% and SFC transaction levy of 0.003% of the Maximum Offer Price, subject to refund if the Offer Price is lower than the Maximum Offer Price. Use of Proceeds Issuance of Units to RCA Fund See the section headed Use of Proceeds in this Offering Circular for details of how the proceeds from the Global Offering will be applied. Prior to and not as part of the Global Offering, 1,000,000,000 Units will be issued by Spring REIT to RCA Fund in exchange for all of the issued RCA01 Shares pursuant to the Reorganization Agreement. Lock-ups The REIT Manager has given certain lock-up undertakings to the Listing Agent, the Sole Global Coordinator and the Hong Kong Underwriters that Spring REIT will not issue any new Units for a period of six months from the Listing Date, subject to certain exceptions. RCA Fund has also given certain lock-up undertakings to the REIT Manager, the Listing Agent, the Sole Global Coordinator and the Hong Kong Underwriters that it will not (a) transfer or dispose of any Units held by it for a period of six months from the Listing Date and (b) transfer or dispose of any Units which would result in it ceasing to hold at least 25% of the Units then in issue during the following period of six months, subject to certain exceptions. See the section headed Underwriting in this Offering Circular for further details. Market Capitalization Pro Forma NAV per Unit as of the Listing Date HK$4,425 million, based on the Maximum Offer Price or HK$4,183 million, based on the Minimum Offer Price. The NAV per Unit is HK$6.01 and HK$5.99 based on the Maximum Offer Price and Minimum Offer Price, respectively. The calculation of the Pro Forma NAV per 17

25 THE GLOBAL OFFERING Unit is arrived at on the basis of the net assets attributable to Unitholders extracted from the unaudited pro forma statements of financial position of Spring REIT set out in Appendix II to this Offering Circular based on the Maximum Offer Price and Minimum Offer Price and on the basis that 1,098,000,000 Units will be in issue upon completion of the Global Offering. Listing and Trading Prior to the Global Offering, there has been no market for the Units. Preliminary approval has been granted by the Hong Kong Stock Exchange for the listing of, and permission to deal in, all the Units on the Main Board of the Hong Kong Stock Exchange. Dealings in Units on the Hong Kong Stock Exchange are expected to commence on Thursday, December 5, If the Hong Kong Stock Exchange grants formal approval for the listing of, and permission to deal in, the Units on the Main Board of the Hong Kong Stock Exchange and Spring REIT complies with the stock admission requirements of HKSCC, the Units will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS, with effect from the Listing Date or any other date that HKSCC chooses. Settlement of transactions between participants of the Hong Kong Stock Exchange is required to take place in CCASS on the second Hong Kong Stock Exchange business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and CCASS Operational Procedures in effect from time to time. All necessary arrangements have been made for the Units to be admitted into CCASS. Stabilization No Redemption Right for Unitholders Profit Forecast (for the FY2013 Distribution Period) In connection with the Global Offering, Credit Suisse, as the Stabilizing Manager, may over-allocate or effect transactions with a view to supporting the market price of the Units at a level higher than that which might otherwise prevail in the open market for a period of 30 days after the last date for lodging applications under the Hong Kong Public Offering. Unitholders have no right to request that the REIT Manager redeem their Units at any time. Listing of the Units on the Hong Kong Stock Exchange does not guarantee a liquid market for the Units. The REIT Manager forecasts that, in the absence of unforeseen circumstances and on the basis and assumptions set out in the section headed Profit Forecast in this Offering Circular, the profit attributable 18

26 THE GLOBAL OFFERING to Unitholders and the Annual Distributable Income of Spring REIT for the FY2013 Distribution Period will be not less than US$1.2 million and US$2.1 million, respectively. For further details, including the principal assumptions on which the forecast is based, see the section headed Profit Forecast in this Offering Circular. Distributions The REIT Manager s policy is to distribute to Unitholders as distributions an amount of no less than 90% of Spring REIT s Annual Distributable Income for each financial year, as more fully described in the section headed Distribution Policy in this Offering Circular. Pursuant to the Trust Deed, the REIT Manager may at its discretion from time to time direct the Trustee to make distributions over and above the minimum 90% of Annual Distributable Income. The REIT Manager currently intends to distribute 100% of the Annual Distributable Income for the period from the Listing Date to December 31, 2013 and for the financial year ending December 31, Distributions will be declared in Hong Kong dollars. See the section headed Risk Factors in this Offering Circular for a discussion of factors that may adversely affect the ability of Spring REIT to make distributions to Unitholders. Statement of Distributions Spring REIT expects to achieve a total distribution amount per Unit of not less than HK$0.015 in respect of the FY2013 Distribution Period, representing an annualized distribution yield of 4.94% based on the Maximum Offer Price and 5.23% based on the Minimum Offer Price (in each case excluding other transaction costs). The annualized forecast distribution yields are provided for illustrative purposes only. The annualized actual distribution yield may differ from the annualized forecast distribution yields based on the forecast DPU for the Profit Forecast Period. The distribution amount declared for the FY2013 Distribution Period will be paid to the Unitholders as of the Record Date for such distribution. Pre-IPO Distribution RCA01 paid a distribution, by way of a dividend, of US$15 million to RCA Fund on November 15, See the section headed Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments in this Offering Circular. Tax Considerations See the section headed Taxation in this Offering Circular for further information on certain tax consequences of the purchase, ownership and disposition of the Units. 19

27 THE GLOBAL OFFERING Termination of Spring REIT Risk Factors Spring REIT may be terminated by a Special Resolution of Unitholders and in certain other circumstances as set out in the Trust Deed. See the section headed The Trust Deed and Related Matters in this Offering Circular for further information. Prospective investors should carefully consider the risks connected with an investment in the Units. Certain of these risks are discussed in the section headed Risk Factors in this Offering Circular. 20

28 INFORMATION ABOUT THIS OFFERING CIRCULAR AND THE GLOBAL OFFERING RESPONSIBILITY FOR THE CONTENTS OF THIS OFFERING CIRCULAR The REIT Manager and the Directors (whose names appear in the section headed Parties Involved in the Global Offering in this Offering Circular) jointly and severally accept full responsibility for the accuracy of the information contained in this Offering Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no material facts the omission of which would make any statement in this Offering Circular misleading. Mr. Toshihiro Toyoshima and Mr. Hideya Ishino, being the executive directors of AD Capital, the manager of RCA Fund, jointly and severally accept full responsibility for the accuracy of the information contained in this Offering Circular and confirm, having made all reasonable enquiries, that to the best of their knowledge and belief, there are no material facts the omission of which would make any statement in this Offering Circular misleading. SFC AUTHORIZATION Spring REIT has been authorized by the SFC under section 104 of the SFO. SFC authorization is not a recommendation or endorsement of a scheme nor does it guarantee the commercial merits of a scheme or its performance. It does not mean the scheme is suitable for all investors nor is it an endorsement of its suitability for any particular investor or class of investors. The SFC does not take any responsibility for the financial soundness of Spring REIT or for the correctness of any statements made or opinions expressed in this Offering Circular and other documents relating to Spring REIT. UNDERWRITING This Offering Circular is published solely in connection with the Hong Kong Public Offering, which forms part of the Global Offering. For applicants under the Hong Kong Public Offering, this Offering Circular and the Application Forms contain the terms and conditions of the Hong Kong Public Offering. The Global Offering is managed by the Sole Global Coordinator. Pursuant to the Hong Kong Underwriting Agreement, the Hong Kong Public Offering is underwritten by the Hong Kong Underwriters. Pursuant to the International Underwriting Agreement, the International Offering is expected to be underwritten by the International Underwriters. Further details about the Underwriters and the underwriting arrangements are contained in the section headed Underwriting in this Offering Circular. DISTRIBUTION AND SELLING RESTRICTIONS The Hong Kong Public Offering Units are offered solely on the basis of the information contained and representations made in this Offering Circular and the Application Forms and on the terms and subject to the conditions set out herein and therein. No person is authorized to give any information in connection with the Hong Kong Public Offering or to make any representation not contained in this Offering Circular, and any information or representation not contained herein must not be relied upon as having been authorized by Spring REIT, the REIT Manager, AD Capital, the Trustee, RCA Fund, the Underwriters, the Listing Agent, any of their respective directors, agents, employees or advisors or any other persons involved in the Global Offering. 21

29 INFORMATION ABOUT THIS OFFERING CIRCULAR AND THE GLOBAL OFFERING The Units have not been, and will not be, registered under the U.S. Securities Act or any state securities law in the United States. The Global Offering is being made in accordance with Regulation S. No action has been or will be taken in any jurisdiction that would permit a public offering of the Units or the possession, circulation or distribution of this Offering Circular or any other offering or publicity material relating to Spring REIT or the Units in any country or jurisdiction other than Hong Kong. Accordingly, the Units are being offered and sold only outside the United States in offshore transactions in accordance with Regulation S. The Units may not be offered or sold, directly or indirectly, and neither this Offering Circular nor any other offering material, circular, form of application or advertisement in connection with the Global Offering may be distributed or published in, to or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction. Each person acquiring Units will be required to confirm, or by the acquisition of Units will be deemed to have confirmed, that he is aware of the restrictions on offers of Units described in this Offering Circular. Applicants for Units are recommended to consult their professional advisors if they are in any doubt as to the regulatory implications of subscribing for, purchasing, holding, disposing of or otherwise dealing in Units. APPLICATION FOR LISTING ON THE HONG KONG STOCK EXCHANGE Prior to the Global Offering, there has been no market for the Units. Preliminary approval has been granted by the Hong Kong Stock Exchange for the listing of, and permission to deal in, the Units on the Main Board of the Hong Kong Stock Exchange. No part of the Units is listed on or dealt in on any other stock exchange and no such listing or permission to list is being or is proposed to be sought in the near future. Dealings in the Units on the Hong Kong Stock Exchange are expected to commence on Thursday, December 5, The Units will be traded in board lots of 1,000 Units each. The stock code of Spring REIT is ELIGIBILITY FOR ADMISSION INTO CCASS Subject to the granting of formal approval for the listing of, and permission to deal in, the Units on the Hong Kong Stock Exchange and compliance with the stock admission requirements of HKSCC, the Units will be accepted as eligible securities by HKSCC for deposit, clearance and settlement in CCASS with effect from the date of commencement of dealings in the Units on the Hong Kong Stock Exchange or any other date that HKSCC chooses. Settlement of transactions between participants of the Hong Kong Stock Exchange is required to take place in CCASS on the second Hong Kong Stock Exchange business day after any trading day. All activities under CCASS are subject to the General Rules of CCASS and the CCASS Operational Procedures in effect from time to time. All necessary arrangements have been made for the Units to be admitted into CCASS. 22

30 INFORMATION ABOUT THIS OFFERING CIRCULAR AND THE GLOBAL OFFERING STAMP DUTY No Hong Kong stamp duty is payable in connection with the initial issue of Units to successful applicants under the Hong Kong Public Offering. Subsequent dealings in Units by the Unitholders will be subject to Hong Kong stamp duty. Hong Kong stamp duty will be payable by the purchaser and by the seller on every sale of the Units, whether or not the purchase or sale is on or off the Hong Kong Stock Exchange. The duty is currently charged at the rate of 0.2% of the higher of the consideration paid or the value of the Units transferred (the buyer and the seller each being liable for one-half of the amount of Hong Kong stamp duty payable upon such transfer). In addition, a fixed duty of HK$5 is currently payable on any instrument of transfer of the Units. PROFESSIONAL TAX ADVICE RECOMMENDED Persons who are unsure about the taxation implications of the subscription, purchase, holding, disposal of, dealing in, or the exercise of any rights in relation to the Units should consult a professional advisor. None of Spring REIT, the REIT Manager, the Trustee, RCA Fund, AD Capital, the Underwriters, the Listing Agent, any of their respective directors, agents, employees or advisors or any other persons involved in the Global Offering accepts any responsibility for any tax effects on or liabilities resulting from the subscription for, purchase, holding, disposal of, dealing in or the exercise of any rights in relation to the Units. OFFER PRICE The Maximum Offer Price is HK$4.03 and the Offer Price is expected to be determined by agreement between the REIT Manager, RCA Fund and the Sole Global Coordinator (on behalf of the Underwriters) on the Price Determination Date. See the section headed Structure of the Global Offering in this Offering Circular for details. All applicants are required to pay the Maximum Offer Price of HK$4.03 per Unit (plus brokerage of 1.0%, Hong Kong Stock Exchange trading fee of 0.005% and SFC transaction levy of 0.003% of the Maximum Offer Price), subject to refund if the Offer Price is less than the Maximum Offer Price. PROCEDURES FOR APPLICATION FOR HONG KONG PUBLIC OFFERING UNITS The procedures for applying for the Hong Kong Public Offering Units are set out in the section headed How to Apply for Hong Kong Public Offering Units in this Offering Circular and in the relevant Application Forms. CONDITIONS OF THE HONG KONG PUBLIC OFFERING Details of the conditions of the Hong Kong Public Offering are set out in the section headed Structure of the Global Offering Conditions of the Hong Kong Public Offering in this Offering Circular. 23

31 INFORMATION ABOUT THIS OFFERING CIRCULAR AND THE GLOBAL OFFERING STRUCTURE OF THE GLOBAL OFFERING Details of the structure of the Global Offering, including its conditions, are set out in the section headed Structure of the Global Offering in this Offering Circular. LANGUAGE Translated English names of Chinese laws and regulations, governmental authorities, departments, entities, institutions, natural persons, facilities, certificates, titles and the like included in this Offering Circular and for which no official English translation exists are unofficial translations for identification purposes only. ROUNDING For the purpose of consistency, where applicable and not otherwise stated, percentage figures in this Offering Circular have been rounded to up to one decimal place and certain financial figures have been rounded to the nearest thousand or million, or up to one decimal place, as applicable. Such figures and calculations derived from such figures are therefore subject to rounding adjustments. Any discrepancies in any table or the notes to such table between totals and sums of amounts listed therein are due to rounding adjustments. 24

32 PARTIES INVOLVED IN THE GLOBAL OFFERING Spring REIT As constituted by the Trust Deed entered into on November 14, 2013 in Hong Kong REIT Manager Directors of the REIT Manager Chairman Executive Directors Non-executive Directors Independent Non-executive Directors Responsible Officers of the REIT Manager Trustee Hong Kong Unit Registrar Sole Global Coordinator and Listing Agent Joint Bookrunners and Joint Lead Managers Spring Asset Management Limited Suite 2019, One International Finance Centre 1 Harbour View Street Central Hong Kong Mr. Toshihiro Toyoshima Mr. Lau Jin Tin, Don Mr. Nobumasa Saeki Mr. Toshihiro Toyoshima Mr. Hideya Ishino Mr. Simon Murray Dr. Tin Sek Tang Mr. Liping Qiu Mr. Lau Jin Tin, Don Mr. Nobumasa Saeki Mr. Chung Wai Fai DB Trustees (Hong Kong) Limited 52/F, International Commerce Centre 1 Austin Road West Kowloon Hong Kong Computershare Hong Kong Investor Services Limited Shops /F, Hopewell Centre 183 Queen s Road East Wanchai Hong Kong Credit Suisse (Hong Kong) Limited Level 88, International Commerce Centre 1 Austin Road West Kowloon Hong Kong Credit Suisse (Hong Kong) Limited Level 88, International Commerce Centre 1 Austin Road West Kowloon Hong Kong Mizuho Securities Asia Limited 12/F, Chater House 8 Connaught Road Central Hong Kong 25

33 PARTIES INVOLVED IN THE GLOBAL OFFERING Auditor and Reporting Accountant Selling Unitholder Legal Advisors to the REIT Manager and RCA Fund PricewaterhouseCoopers Certified Public Accountants 22/F, Prince s Building Central Hong Kong RCA Fund 01, L.P. PO Box 1093 Queensgate House Grand Cayman KY Cayman Islands As to Hong Kong and United States laws DLA Piper Hong Kong 17/F Edinburgh Tower The Landmark 15 Queen s Road Central Central Hong Kong As to PRC law Zhong Lun Law Firm 36-37/F, SK Tower 6A Jianguomenwai Avenue Beijing China As to Cayman Islands law Maples and Calder 53/F, The Center 99 Queen s Road Central Hong Kong Legal Advisors to the Listing Agent and the Underwriters As to Hong Kong and United States laws Freshfields Bruckhaus Deringer 11/F, Two Exchange Square Central Hong Kong As to PRC law Jun He Law Offices 32/F, Shanghai Kerry Centre 1515 Nanjing Road West Shanghai China Legal Advisor to the Trustee As to Hong Kong law Mayer Brown JSM 16-19/F, Prince s Building 10 Chater Road Central Hong Kong 26

34 PARTIES INVOLVED IN THE GLOBAL OFFERING Independent Property Valuer Property Consultant Market Consultant Receiving Banks Colliers International (Hong Kong) Limited Suite 5701, Central Plaza 18 Harbour Road Wanchai Hong Kong Nikken Sekkei Ltd Iidabashi, Chiyoda-ku Tokyo Japan DTZ Debenham Tie Leung Limited 16/F, 1063 King s Road Quarry Bay Hong Kong Bank of China (Hong Kong) Limited 1 Garden Road Hong Kong Standard Chartered Bank (Hong Kong) Limited 15/F Standard Chartered Tower 388 Kwun Tong Road Hong Kong 27

35 RISK FACTORS An investment in the Units involves significant risks. Prospective investors should consider carefully, together with all other information contained in this Offering Circular, the risk factors described below before deciding to invest in the Units. As an investment in a collective investment scheme is meant to produce returns over the long term, investors should not expect to obtain short-term gains. Investors should be aware that the price of the Units, and the income from them, may rise or fall. Investors should note that they may not get back their original investment and that they may not receive any distributions. The occurrence of any of the following events could harm us. If any of these events occurs, the trading price of the Units could decline and you may lose all or part of your investment. Before deciding to invest in the Units, prospective investors should seek professional advice from their advisors regarding their prospective investment in the context of their particular circumstances. RISKS RELATING TO SPRING REIT The outlook for financial markets and the world economy is uncertain and Spring REIT may be adversely affected by any economic slowdown The global financial crisis which unfolded in 2008 resulted in a marked slowdown in world economic growth, economic contractions in certain markets, more commercial and consumer delinquencies, weakened consumer confidence and increased market volatility. The outlook for financial markets and the world economy is uncertain. In the near term, economic downturns may result in a reduction in business activity and income levels in the PRC and the rest of the world. An economic decline in the PRC and/or the rest of the world could lead to decreases in leasing demand, rental levels and occupancy rates of commercial real estate in Beijing, and thus adversely affect Spring REIT s results of operations and future growth. Adverse economic conditions could adversely affect Spring REIT if they result in: a negative impact on the ability of the tenants to pay their rents in a timely manner or to continue their leases; a negative impact on Spring REIT s ability to attract new and/or retain tenants and maintain high occupancy and rental rates; an increased likelihood that one or more of (i) Spring REIT s lending banks or (ii) Spring REIT s insurers may be unable to honor or renew their commitments to Spring REIT, or that Spring REIT may not be able to obtain sufficient funding for its operations or refinance its indebtedness when required; or an increase in counterparty risk (being the risk of monetary loss which Spring REIT may be exposed to if any of its counterparties encounters difficulty in meeting its obligations under the terms of its respective transactions). Any economic slowdown and any of the above factors could have a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects. 28

36 RISK FACTORS Spring REIT may be unable to renew leases or re-lease vacant space at the same or higher rental rates or at all upon lease expirations or early terminations As of June 30, 2013, leases representing approximately 28%, 31% and 12% of the Leased Office GFA of the Property were scheduled to expire in the six months ending December 31, 2013, and the years ending December 31, 2014 and 2015, respectively. In addition, leases may be terminated before expiration, especially during an economic downturn. There is no assurance that Spring REIT will be able to renew these leases or secure replacement tenants for the vacant space at the same or higher rental rates. If Spring REIT is unable to renew leases or re-lease a significant portion of available space, Spring REIT may experience long periods of vacancy at the Property. In addition, the current rental yield may not be sustained. Spring REIT may have to lower rental rates to secure tenants which would also negatively affect revenue. As a result, Spring REIT s business, financial condition, results of operations, cash flows, prospects and its ability to satisfy its debt service obligations could be materially adversely affected. Spring REIT s operations may be adversely affected if the Property Manager fails to operate and manage the Property in an efficient and effective manner or terminates the Property Management Agreement before expiration or decides not to renew the Property Management Agreement upon expiration The Property Manager is appointed by RCA01 as its agent to conduct the day-to-day operation and management of the Property under the Property Management Agreement. The Property Manager is responsible for providing lease management services, building management services and cash management services in respect of the Property, and obtaining and maintaining all approvals and permits necessary for the operation and management of the Property. Among other things, the Property Manager manages the execution of lease agreements and the collection of rents and the payment of costs and expenses concerning the operation of the Property. The failure of the Property Manager to manage the Property in an efficient and effective manner may have a negative impact on the overall operation of the Property, such as lower quality of building management services and lower rental incomes from poor lease management, which in turn may materially adversely affect the underlying value of the Property and Spring REIT s business, financial condition, results of operations and prospects. Furthermore, if the Property Manager terminates the Property Management Agreement before expiration or decides not to renew the Property Management Agreement upon expiration on August 31, 2015, the REIT Manager may not be able to replace the Property Manager in a timely manner, or on terms similar to those under the Property Management Agreement. During any period where there is no property manager in place, Spring REIT would face a substantial disruption to its operations. As a result, Spring REIT s business, financial condition, results of operations and prospects could be materially adversely affected. Currency fluctuations, especially in the value of RMB, could affect the amount of distributions to Unitholders and the market value and sale price of the Units The revenue received from the Property is denominated in RMB, which will have to be converted into (i) U.S. dollars to make principal and interest payments under the Term Loan Facility and (ii) Hong Kong dollars for the payment of the distributions to the Unitholders. Accordingly, Spring REIT is exposed to risks associated with exchange rate fluctuations, 29

37 RISK FACTORS which may adversely affect Spring REIT s results of operations due to the translation of currencies. The value of the RMB against the U.S. dollar, Hong Kong dollar and other foreign currencies fluctuates and is affected by changes in the PRC and international political and economic conditions and many other factors. The value of the distributions received by a Unitholder may be adversely affected by fluctuations in the exchange rates between the RMB, U.S. dollar, Hong Kong dollar and any other currencies that may be adopted from time to time. Although the RMB has appreciated against the U.S. dollar and the Hong Kong dollar in the past few years, there is no assurance that the value of the RMB will not decrease in the future. A depreciation of the RMB may result in a decrease in the market value of the Units and the value of the proceeds denominated in Hong Kong dollars that a Unitholder would receive upon sale of the Units in Hong Kong. A decrease in the fair value of the Property at revaluation could result in a decrease in the net profit of Spring REIT for the relevant period and trigger certain events which may lead to adverse consequences under the Term Loan Facility and the REIT Code Under Spring REIT s accounting policies, any decrease in the fair value of the Property would result in non-cash charges to the statement of comprehensive income, and may give rise to a substantial decline in net profit for the relevant period. If any decrease in the fair value of the Property results in a breach of the loan-to-value covenants in the Term Loan Facility, Spring REIT may be required to apply cash flow from the Property to prepay the Term Loan Facility in part to remedy such breach, and any failure or inability to do so may cause an event of default under the Term Loan Facility. As a result, Spring REIT s business, financial condition, results of operations and prospects could be materially adversely affected. In addition, Spring REIT s borrowings are limited by the REIT Code to no more than 45.0% of its total gross asset value and a downward revaluation of assets may result in a breach of this borrowing limit requirement. Upon the completion of the Global Offering, the aggregate amount of existing borrowings of Spring REIT will represent approximately 33.9% (based on the Maximum Offer Price) and 34.1% (based on the Minimum Offer Price) of the total gross asset value of Spring REIT, based on the unaudited pro forma statement of financial position of Spring REIT set out in Appendix II to this Offering Circular. A downward revaluation of assets may result in a breach of the borrowing limit under the REIT Code. In the event of such a breach, Spring REIT would not be able to incur further borrowings or draw down on its loan facilities, and the REIT Manager would be required to use its best endeavors to reduce excess borrowings, which may constrain its operational flexibility including the ability to make new investments or acquisitions. The REIT Manager is required to inform Unitholders and the SFC of the magnitude of the breach, the cause of the breach, the proposed method of rectification and the progress of the rectification on a regular basis. The results of operations and value of Spring REIT may be adversely affected by fluctuations in interest rates Fluctuations in interest rates may increase Spring REIT s interest costs incurred under the Term Loan Facility and they may adversely affect the financial position of Spring REIT and the ability of Spring REIT to make distributions to Unitholders. The Term Loan Facility has a floating interest rate of three-month LIBOR plus 3.5% per annum. For details of the Term Loan Facility, see the section headed Material Agreements and Other Documents Relating to Spring REIT US$515,000,000 Secured Term Loan Facility Agreement in this Offering Circular. In addition, fluctuations in interest rates may have an adverse effect on the 30

38 RISK FACTORS level of activity in the property market and as a result may have a material adverse effect on the business, financial condition, results of operations, value of the Property and prospects of Spring REIT. Spring REIT will operate principally through its interest in RCA01 and relies on income earned from the Property to make distributions and there are various risks relating to RCA01 s ability to make distributions. Spring REIT may not be able to make distributions to Unitholders in a timely manner or at all or the level of distributions may fall Spring REIT will operate principally through its interest in RCA01, the real estate investment of which currently consists solely of the Property. RCA01 relies on the income earned from the Property to make distributions to Spring REIT. Any negative performance or results of operations with respect to the Property will adversely affect the overall performance of Spring REIT and the ability of Spring REIT to make distributions to Unitholders in a timely manner or at all. If the Property and any other properties which Spring REIT acquires in the future do not generate sufficient operating profit, Spring REIT s business, financial condition, results of operations, prospects and its ability to make distributions to the Unitholders may be materially adversely affected. The ability of RCA01 to make distributions to Spring REIT will depend on a variety of factors including revenue, operating expenses, capital expenditure and debt servicing commitments. There can be no assurance that RCA01 will have sufficient revenue, cash flow and distributable profits in any future period to enable dividends to be paid or advances to be made to Spring REIT, nor is there any assurance that the level of distributions can be maintained or will increase over time. If RCA01 does not have sufficient revenue, cash flow and distributable profits to make distributions to Spring REIT, Spring REIT may be required to obtain financing to satisfy the payment of distributions to Unitholders. If Spring REIT is unable to obtain financing on terms that are acceptable or at all, the amount of distributions to Unitholders could be adversely affected. If Spring REIT obtains financing to support the making of distributions to Unitholders, additional finance costs may be incurred which will, in turn, reduce the distributable income of Spring REIT. Spring REIT s ability to make distributions to Unitholders may be adversely affected by increases in operating expenses without a corresponding increase in revenue in the same period Spring REIT s results of operations and ability to make distributions to Unitholders could be adversely affected if its operating expenses increase without a corresponding increase in revenue. Factors which could lead to an increase in operating expenses include, but are not limited to, the following: increases in taxes and other statutory charges; changes in statutory laws, regulations or government policies which increase the cost of compliance with such laws, regulations or policies; changes in direct or indirect tax policies, laws or regulations; increases in sub-contracted service costs; increases in repair and maintenance costs; 31

39 RISK FACTORS increases in the rate of inflation; defects affecting Spring REIT s properties; environmental pollution in connection with Spring REIT s properties; increases in insurance premium; increases in the cost of utilities; costs and expenses not covered by the existing insurance policies; and increases in labor costs. Spring REIT s results of operations may be adversely affected if it fails to retain or replace certain key personnel of the REIT Manager and the Property Manager Spring REIT s success depends, in part, upon the continued service and performance of the key executive officers and certain other key senior personnel of the REIT Manager and the Property Manager. These persons may leave the REIT Manager or the Property Manager in the future, and also may thereafter compete with it and Spring REIT. The loss of any of these individuals and the inability to recruit suitable replacements could have a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects. Spring REIT s portfolio growth depends on its ability to obtain external sources of capital In order to maintain Spring REIT s qualification as a REIT, it is required under the REIT Code to annually distribute at least 90% of its audited annual net income after tax, subject to certain adjustments. In addition, the REIT Manager has the discretion to distribute additional amounts. For more details on Spring REIT s distribution policy, see the section headed Distribution Policy in this Offering Circular. Therefore, Spring REIT may not be able to fund future capital needs, including any necessary acquisition financing, from its operating cash flow. Consequently, it may need to rely on external sources of funding to expand its portfolio, which may not be available in a timely manner on commercially acceptable terms or at all. In addition, the amount of funds that Spring REIT can borrow is subject to the loanto-value covenants under the Term Loan Facility and the borrowing limit of 45.0% of the total gross asset value of Spring REIT under the REIT Code. If Spring REIT cannot obtain capital from external sources or on commercially acceptable terms in a timely manner, it may not be able to acquire properties when strategic opportunities exist. As a result, the business, financial condition, results of operations and prospects of Spring REIT could be materially adversely affected. The REIT Manager may not be able to achieve its key objectives for Spring REIT and its stated strategies for accomplishing such objectives may change The REIT Manager s key objectives for Spring REIT are to provide the Unitholders with stable distributions and the potential for sustainable long-term growth in the distributions and enhancement in the value of the real estate assets. While the REIT Manager has formulated specific strategies outlined in the section headed Strategy in this Offering Circular to accomplish these key objectives, there can be no assurance that it will be able to 32

40 RISK FACTORS successfully implement such strategies, or that it will be able to do so in a timely and cost effective manner. Unitholders and potential investors should also note that, subject to the requirements of the REIT Code, the Trust Deed, the Listing Agreement and applicable laws and regulations, the REIT Manager has absolute discretion to determine the strategies of Spring REIT and therefore the strategies outlined in the section headed Strategy in this Offering Circular may change. Spring REIT and the REIT Manager are both newly established entities and do not have established operating histories for investors to rely on in making an investment decision The REIT Manager was incorporated on January 29, 2013 and Spring REIT was established on November 14, Accordingly, neither Spring REIT nor the REIT Manager has an operating history by which its respective past performance may be judged and investors may find it difficult to evaluate their business and prospects. In particular, RCA01 s historical financial information included in this Offering Circular may not necessarily reflect Spring REIT s results of operations, financial condition and cash flows in the future or what its results of operations, financial condition and cash flows would have been had it been a separate, stand-alone entity during each of the periods presented. Further, there can be no assurance that the REIT Manager will be able to successfully operate Spring REIT as a REIT or as a publicly listed entity. The REIT Manager s operations are subject to regulation and its licensing conditions The REIT Manager is required to be licensed under the SFO for the regulated activity of asset management. No assurance can be given that the REIT Manager will be operated and managed in accordance with its licensing and approval conditions. In particular, the departure of any of the three responsible officers of the REIT Manager may result in the loss of the REIT Manager s license to act as the manager of Spring REIT. There can be no assurance that the REIT Manager will be able to retain new qualified responsible officers in a timely manner or to appoint new qualified responsible officers on commercially acceptable terms in order to maintain the REIT Manager s license. In the event that the REIT Manager ceases to be licensed under the SFO, Spring REIT may need to appoint other licensed or approved management companies. The loss of the services of the REIT Manager may materially adversely affect the business, financial condition, results of operations and prospects of Spring REIT if a competent successor cannot be found. In the event that no other management companies duly licensed or approved are willing to replace the existing REIT Manager, the Trustee may terminate Spring REIT. Spring REIT may face risks associated with debt financing and the debt covenants in the financing agreements could limit or adversely affect Spring REIT s operations Spring REIT s level of debt and the covenants imposed on it by its current or future financing agreements (whether directly or through RCA01) could have significant adverse consequences, including, but not limited to, the following: (i) its cash flow may be insufficient to meet its required principal and interest payments; (ii) it may be unable to borrow additional funds as needed or on commercially acceptable terms; (iii) it may be unable to refinance its indebtedness upon maturity or the refinancing terms may be less favorable than the terms of the original indebtedness; (iv) it may default on its obligations and the lenders or mortgagees may foreclose on its properties, and require a forced sale of the mortgaged property, or foreclose on its interests in the entities that own the properties and require a forced sale of 33

41 RISK FACTORS those entities; (v) it is subject to restrictive covenants under the Term Loan Facility and may be subject to similar covenants in future loan agreements, which limit or may limit or otherwise adversely affect Spring REIT s or RCA01 s operations, such as their ability to incur additional indebtedness, acquire properties, make certain other investments, make capital expenditures, or make distributions from RCA01 to Spring REIT and from Spring REIT to Unitholders; (vi) it is subject to a prescribed debt service coverage ratio under the Term Loan Facility and may be required to hold funds in a prescribed account or apply the funds on deposit in the prescribed account towards the prepayment of the loan if it fails to comply with such debt service coverage ratio; (vii) it may violate covenants under the Term Loan Facility and in future loan documents, which would entitle the lenders to accelerate its debt obligations; and (viii) its default under any one of its loan agreements could result in a cross default under other indebtedness. If any one or more of these events were to occur, Spring REIT s business, financial condition, results of operations, cash flow, prospects and its ability to satisfy its debt service obligations and make distributions to Unitholders could be materially adversely affected. If payments under the current or future bank borrowings of Spring REIT are not made when required, the lending banks may declare a default and enforce the security. Also, if certain covenants under the relevant loan agreements are breached, the lending bank may declare an event of default, demand the immediate repayment of all outstanding loans and other sums payable under such loan agreements and enforce the security. Further, Spring REIT may, from time to time, require debt financing to achieve the REIT Manager s investment strategies. Spring REIT will be subject to risks normally associated with debt financing. Payments of principal and interest on borrowings may leave Spring REIT with insufficient cash resources to operate the Property or make distributions to Unitholders necessary to maintain its REIT qualification. As a result, the business, financial condition, results of operations and prospects of Spring REIT could be materially adversely affected. Spring REIT s investments or acquisitions in the future may not be successful, which may adversely affect the results of operations of Spring REIT Spring REIT may invest in or acquire other commercial and commercial-related real estate assets in the future. These assets may expose Spring REIT to additional local real estate market conditions, such as competition and supply and demand conditions. The success of any investment or acquisition will depend on a number of factors, including Spring REIT s ability to identify suitable acquisition targets, complete and integrate successfully the acquisition into Spring REIT s business, and execute the acquisition strategies. As a result, there can be no assurance that Spring REIT s investments or acquisitions in the future will be successful, which in turn may incur loss and materially adversely affect the business, the results of operation, financial condition and prospects of Spring REIT. There are potential conflicts of interest between Spring REIT and AD Capital and the Property Manager AD Capital may influence the affairs of Spring REIT through its control over RCA Fund and the REIT Manager. RCA Fund, a fund managed by AD Capital pursuant to a management agreement between AD Capital and RCA Fund (acting through its general partner, RCAC), is expected to hold, immediately following the completion of the Global Offering, 658,500,000 Units (constituting 60.0% of the total number of Units in issue) (assuming that the Overallotment Option is not exercised) or 592,575,000 Units (constituting 54.0% of the total 34

42 RISK FACTORS number of Units in issue) (assuming the Over-allotment Option is exercised in full). AD Capital will therefore have the ability to influence RCA Fund s right as a Unitholder in respect of the affairs of Spring REIT (in so far as such matters are subject to the vote by the Unitholders and RCA Fund is not required to abstain from voting), including in relation to approval of significant corporate transactions, such as acquisitions or disposals. In addition, the REIT Manager is a wholly-owned subsidiary of AD Capital and some of its non-executive Directors are also directors and/or senior executives of AD Capital. AD Capital may exercise influence over the activities of Spring REIT through the REIT Manager. The principal activities of AD Capital include investment in, among other things, real estate assets and although, prior to the completion of the Global Offering, the Property is currently AD Capital s only real estate investment in the PRC, there can be no assurance that AD Capital will not invest in real estate assets in Beijing or elsewhere in the PRC in the future. Moreover, AD Capital may in the future manage or invest in other real estate investment trusts or other vehicles which may compete with Spring REIT. There can be no assurance that conflicts of interest will not arise between Spring REIT and AD Capital in the future. The Property Manager is currently 40% owned by AD Capital and 60% by third parties. If the Property Manager were to manage a property which competes with the Property, there can be no assurance that the Property Manager will not favor those properties owned by AD Capital or such third parties over the Property when providing management services to Spring REIT, which could lead to lower occupancy rates and/or lower rental income for the Property as a whole and thus materially adversely affect the business, financial condition, results of operations and prospects of Spring REIT and distributions to Unitholders. The representations, warranties and indemnities granted in favor of Spring REIT by RCA Fund are subject to limitations The representations, warranties and indemnities granted in favor of Spring REIT by RCA Fund pursuant to the Reorganization Agreement and the Deed of Tax Covenant are subject to limitations as to their scope and as to the amount and timing of claims which can be made thereunder. Generally, a claim for a breach of any representation, warranty or undertaking by RCA Fund under the Reorganization Agreement must be made within three years from the date of Completion and a tax-related claim under the Deed of Tax Covenant must be made within seven years from the date of Completion. In addition, the aggregate maximum liability of RCA Fund in respect of all claims made under the Reorganization Agreement and the Deed of Tax Covenant shall not exceed the aggregate value of the Units issued to RCA Fund under the Reorganization Agreement at the final Offer Price. Based on the Offer Price range stated in this Offering Circular of between HK$3.81 and HK$4.03, the maximum liability of RCA Fund in this respect is expected to be between HK$3,810 million and HK$4,030 million. There is no assurance that any breaches by RCA Fund of such representations, warranties and indemnities can be identified and a claim made within such limitation periods or that Spring REIT will be compensated for all losses or liabilities suffered or incurred as a result of such breaches by RCA Fund. RCA Fund and AD Capital may not be able to meet their respective obligations under the Reorganization Agreement and the Deed of Tax Covenant To support its obligations under the Reorganization Agreement and the Deed of Tax Covenant, RCA Fund has undertaken to retain 15% of the Units in issue immediately upon 35

43 RISK FACTORS completion of the Global Offering for a period of three years from the date of Completion (being the limitation period for general claims under the Reorganization Agreement), and thereafter 10% of the Units in Spring REIT in issue at the completion of the Global Offering for the next two years (to support, in part, the remaining limitation period for tax claims under the Deed of Tax Covenant). There is no assurance that the Units retained by RCA Fund will be sufficient to satisfy any claims made against RCA Fund under the Reorganization Agreement and the Deed of Tax Covenant since the Units retained represent only a portion of the aggregate Units issued to RCA Fund pursuant to the Reorganization Agreement, the retention period for such Units does not cover the entire limitation period for claims under the Deed of Tax Covenant and the value of such Units will depend on the prevailing market price of such Units. In addition, AD Capital has agreed to guarantee to the Trustee the performance by RCA Fund of its indemnification and retention obligations under the Reorganization Agreement and the Deed of Tax Covenant. However, there is no assurance that AD Capital will have the financial resources to satisfy any claims made pursuant to that guarantee. Spring REIT may engage in hedging transactions, which can limit gains and increase exposure to losses, and not offer full protection against interest rate and exchange rate fluctuations Spring REIT may enter into hedging transactions to protect itself from the effects of interest rate fluctuations on floating rate debt and exchange rate fluctuations. Hedging transactions may include entering into hedging instruments, purchasing or selling futures contracts, purchasing put and call options or entering into forward agreements. However, hedging activities may not always have the desired beneficial effect on the results of operations or financial condition of Spring REIT. The REIT Manager currently does not have any immediate plans to enter into any other hedging transactions, apart from the plain vanilla interest rate caps entered into by RCA01 in February 2013 to economically hedge the interest rate risk arising from the Term Loan Facility with principal amount of US$515 million. For more information on the hedging transactions RCA01 has entered into, please see the section headed Management s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosure about Market Risk in this Offering Circular. No hedging activity can completely insulate Spring REIT from risks associated with changes in interest rates and exchange rates. Moreover, hedging could fail to protect or adversely affect Spring REIT because, among other things: the available hedging may not correspond directly with the risk for which protection is sought; the duration or nominal amount of the hedge may not match the duration of the related liability; the party owing money in the hedging transaction may default on its obligation to pay; the credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs the ability of Spring REIT to sell or assign its side of the hedging transaction; and the value of the derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value. Downward adjustments and the significant loss in value of hedging instruments due to a write down to fair value would reduce the NAV of Spring REIT. 36

44 RISK FACTORS Hedging involves risks and typically involves costs, including transaction costs, which may reduce overall returns. These costs increase as the period covered by the hedging increases and during periods of rising and volatile interest rates. These costs will also limit the amount of cash available for distributions to the Unitholders. The outbreak of an infectious disease or any other serious public health concerns in Asia and elsewhere could adversely impact the business, financial condition and results of operations of Spring REIT The outbreak of infectious diseases such as Influenza A (H1N1), avian influenza (H5N1 and H7N9), Severe Acute Respiratory Syndrome (SARS), Middle East Respiratory Syndrome Coronavirus (MERS-CoV) or other serious public health concerns in Beijing or Asia, together with any resulting restrictions on travel and/or the imposition of quarantines, could have a negative impact on economic and business activities in Beijing and Asia and could thereby adversely impact the revenues and performance of Spring REIT. In particular, there have been a number of outbreaks of H7N9 bird flu in several provinces in the PRC. A further spread of H7N9 bird flu may have a negative impact on the economic and business activities in China and thereby adversely affect Spring REIT s results of operation. There can be no assurance that any precautionary measures taken against infectious diseases will be effective. A future outbreak of an infectious disease or any other serious public health concerns in Asia and elsewhere could have a material adverse effect on the business, financial condition, results of operations and prospects of Spring REIT. Spring REIT s internal control policies and procedures may not be effective The REIT Manager has established corporate governance policies and operational procedures that seek to prevent misconduct and fraud in the operation and financial management of Spring REIT. However, there can be no assurance that these policies and procedures will be effective and that there will not be any misconduct and fraud by the management and employees of the REIT Manager. In addition, Spring REIT is managed by management teams based in mainland China, Hong Kong and Tokyo, which may increase the risk of violations of these policies and procedures. If Spring REIT s internal control policies and procedures are not effective, Spring REIT s business, financial condition, results of operations and prospects may be adversely affected. RISKS RELATING TO THE PROPERTY Spring REIT presently relies on the Property for all of its revenue Spring REIT presently relies on the Property for all of its revenue. This concentration may entail a higher level of risk as compared to some other REITs and listed real estate corporations that have more than one property, in particular those with properties which are spread over several different locations or which have a more diverse range of investments. Any circumstance that adversely affects the operations or business of the Property, or its attractiveness to tenants, may adversely affect the revenue generated by the Property, and Spring REIT will not have income from other properties to mitigate any ensuing loss arising from such circumstances. As a result, the business, financial condition, results of operations and prospects of Spring REIT could be materially adversely affected. In addition, a concentration of investment in the Property causes Spring REIT to be highly susceptible to market conditions in the PRC as a whole and Beijing and its CBD in particular. 37

45 RISK FACTORS RCA01 is subject to taxes that may increase or be imposed in the future, which may adversely affect Spring REIT s financial condition RCA01 is subject to the various types of taxes in the PRC on the income and gains derived from the operation of the Property, such as income tax (including withholding tax and capital gains tax), business tax, real estate tax, land use tax and stamp duty. In the event of a disposal of the Property, the income and gains derived by RCA01 may also be subject to various types of taxes in the PRC, including income tax, business tax, land appreciation tax, stamp duty and local surcharge implications in the PRC. For more information on the taxes that RCA01 is subject to, please see the section headed Taxation PRC Taxation of RCA01 in this Offering Circular. There is no assurance that these existing taxes and the taxation bases will not vary in the future. Further, certain taxes in the PRC such as the real estate tax are subject to the discretion or practice of local tax bureaus, and thus the amount of taxes payable may vary. If the tax assessed in respect of the Property increases, the business, financial position, results of operations, prospects and distributions of Spring REIT could be adversely affected. The Appraised Value is based on various assumptions and the price at which Spring REIT is able to sell the Property may be different from the Appraised Value or the initial acquisition price of the Property The Independent Property Valuer s Valuation Report is contained in Appendix IV to this Offering Circular. In conducting its valuation of the Property, the Independent Property Valuer primarily adopted discounted cash flow and the income capitalization approach. The valuation was based on certain assumptions and required a subjective determination of certain factors relating to the Property, such as its relative market position, its financial and competitive strengths, location and its physical condition. There can be no assurance that the assumptions are accurate measures of the market or that the Property was valued accurately. Further, the Appraised Value of the Property is not an indication of, and does not guarantee, a sale price at that value at present or in the future. The price at which Spring REIT may sell the Property in the future may be lower than the Appraised Value or the initial acquisition price of the Property. These factors may have a material adverse effect on the business, financial condition, results of operations and prospects of Spring REIT. The survey exercise carried out by the Property Consultant on the Property may not have identified all material defects, breaches of laws and regulations and other deficiencies In connection with the acquisition of the Property by Spring REIT by way of acquisition of RCA01, due diligence reviews, surveys and inspections of the Property have been conducted by the Property Consultant. A letter from the Property Consultant in relation to its due diligence survey report is set out in Appendix V to this Offering Circular. The due diligence survey comprised, among other things: (i) visual inspection of the Property; (ii) visual inspection of the current building layouts and usage against the latest approved building plans; (iii) visual inspection of major accessible building elements, including the façade, units, external walls, roofs, corridors, lavatories, electrical and mechanical plant rooms; and (iv) visual inspection of all major building services installations, including mechanical ventilation, air conditioning, fire services, electricity, lifts and plumbing. 38

46 RISK FACTORS Nevertheless, the due diligence process with respect to the physical condition of the Property has been limited. There can be no assurance that such reviews, surveys or inspections (or the relevant review, survey or inspection reports on which Spring REIT, the REIT Manager and the Listing Agent have relied) would have revealed all defects or deficiencies affecting the Property. In particular, there can be no assurance as to the absence of: (i) latent or undiscovered defects or deficiencies; or (ii) inaccuracies or deficiencies in such reviews, surveys or inspection reports. If the Property has any other material latent property or equipment defects which have not been identified, Spring REIT may incur additional capital expenditures, liabilities and expenses, other than those disclosed in this Offering Circular. Costs or liabilities arising from such property or equipment defects may involve significant and potentially unpredictable patterns and levels of expenditure, which may have a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects. The land which the Property occupies or parts thereof may be resumed compulsorily by the PRC Government when the use term of the land expires or before the end of such use term where a legitimate public interest for requisition of such land is established The PRC Government has the power to resume compulsorily any land in the PRC when the use term of the land expires or before the end of such use term where a legitimate public interest for requisition of such land is established. In such event, the existing occupier of the land would no longer have any right to occupy the land and any immoveable assets on the land would cease to be owned by the existing occupier. In the event of any compulsory resumption of property in the PRC before the end of its use term, the land user will be compensated by the PRC Government. However, if the land use right in respect of the Property was so resumed compulsorily by the PRC Government, the level of compensation paid to RCA01 as the owner of the Property may be less than the price which Spring REIT paid for its interest in the Property. This may have a material adverse effect on the business, financial condition, results of operations and prospects of Spring REIT. The Property may face increased competition from other properties in Beijing and other cities in the PRC The office building property sector in the CBD of Beijing is a competitive market. Spring REIT competes for tenants with developers, owners and operators of office buildings in the CBD of Beijing, including Office Tower 3 in China Central Place, which is owned by Beijing Guohua. New supply of office buildings in the CBD will result in additional competition for tenants, and approximately 1.1 million sq.m. of Grade A office space in Beijing is anticipated to enter into the market from 2013 to 2016 according to DTZ. Any renovations and upgrading of competing office building properties may also reduce the competitiveness of older or existing properties such as the Property, which was constructed more than six years ago. In addition, one of the key attractions of the Property is its location within the CBD of Beijing. As other business districts in Beijing develop and become popular with businesses, the Property may become less attractive to existing and potential tenants. Such developments could cause existing tenants in the Property to relocate away from the Property, and Spring REIT may have to lower rental rates at the Property in order to retain existing tenants or attract new tenants. Further, Spring REIT s competiveness and attractiveness depend, to a large extent, on the local conditions of Beijing and the CBD in Beijing, such as environment and 39

47 RISK FACTORS transportation. Severe environmental pollution such as severe smog and air pollution and traffic congestion problems in Beijing may adversely affect the competiveness and attractiveness of Beijing as an office location for corporations. If a significant number of tenants relocate their offices to other cities in the PRC, or to areas outside the CBD in Beijing, as a result of the local conditions in Beijing and the CBD in Beijing, Spring REIT s business, financial condition, results of operation and prospects may be materially adversely affected. There can be no assurance that new or existing competing properties will not offer lower rental rates or greater convenience, service, amenities or environmental conditions in the market in which the Property operates. An inability to compete effectively could result in the loss of tenants and rental income, and a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects. The Property is in part dependent upon the maintenance and development of the other parts and the brand name of China Central Place, which are not within the REIT Manager s control The Property is part of China Central Place in Beijing, a mixed-use development consisting of (i) three Premium Grade office buildings; (ii) Shin Kong Place, one of the largest department stores in China by sales, and other shopping areas in China Central Mall, China Central Square and China Central Commercial Street, (iii) two five-star luxury hotels, The Ritz-Carlton Hotel Beijing and JW Marriott Hotel Beijing, and (iv) residential and serviced apartment buildings and a clubhouse. The real estate assets of China Central Place other than the Property are not owned by Spring REIT. The attractiveness and competitiveness of the Property are partially dependent on the quality of maintenance and development level of the other parts of China Central Place, which are outside the REIT Manager s control. The failure by the respective owners and operators to manage or develop the other parts of China Central Place appropriately may adversely affect the attractiveness and marketability of the Property. In addition, the operations of the Property may also be affected or disrupted by the redevelopment or renovation or physical damage to the other parts of China Central Place. Further, there is no assurance that any of Shin Kong Place, The Ritz-Carlton Hotel Beijing or JW Marriott Hotel Beijing will not relocate to other places in Beijing. Furthermore, any degradation or adverse market developments relating to the China Central Place brand name or any negative publicity affecting China Central Place could adversely affect the results of operations of the Property. Any of these events may adversely affect the prestige and marketability of China Central Place as a whole and the Property in particular, which in turn could materially adversely affect the business, financial condition, results of operations and prospects of Spring REIT. Renovation or redevelopment works or physical damage to the Property may disrupt the operations of the Property and require capital expenditures periodically beyond the REIT Manager s current estimates The quality and design of the Property have a direct influence over the demand for space in, and the rental rates of, the Property. The Property may need to undergo renovation or redevelopment works from time to time to maintain its competitiveness and may also require additional capital expenditure, special repair or maintenance expenses in respect of faults or problems that may develop or physical damage resulting from fire or other causes or because of new planning laws or regulations. As a result, Spring REIT may incur periodic capital expenditures for refurbishment and renovation of the Property in order to remain competitive 40

48 RISK FACTORS or be income-producing. The costs of maintaining commercial property and the risk of significant and potentially unexpected maintenance or repair requirements tend to increase over time as the building ages. The business and operations of the Property may suffer some disruption and it may not be possible to collect the full or any rental income on space affected by such renovation and redevelopment works. As a result, Spring REIT s business, financial condition, results of operations and prospects may be materially adversely affected. Existing or planned amenities and transportation infrastructure near the Property may be closed, relocated, terminated, delayed or abandoned There is no assurance that existing or planned amenities, transportation infrastructure and public transportation services near the Property will not be closed, relocated, terminated, delayed or abandoned. If such an event were to occur, it may adversely impact the accessibility of the Property and the attractiveness and marketability of the Property to tenants. As a result, it may lead to decreases in rental rates and occupancy rates of the Property, which in turn could materially adversely affect the business, financial condition, results of operations and prospects of Spring REIT. The loss of key tenants or any breach of their obligations under the lease agreements may have an adverse effect on Spring REIT s financial condition and results of operations In the event that any key tenant experiences a downturn in their businesses, it may be unable to make timely rental payments. Spring REIT s claims for unpaid rent against a bankrupt tenant may not be paid in full. In addition, Spring REIT would incur time and expense relating to any eviction proceedings and would be unable to collect rent during such proceedings. Further, when key tenants decide not to renew their leases or terminate early, Spring REIT may not be able to re-let the space at all or on similar terms. As a result of these events, Spring REIT s cash flow, rental income, and profit could decrease and it may not be able to make distributions to Unitholders. Furthermore, loss of major tenants, especially tenants who are international or national leading brands, may adversely affect the attractiveness and prestige of the Property and thus Spring REIT s business, financial condition, results of operations and prospects. Factors that affect the ability of such major tenants to meet their obligations include, but are not limited to: their financial position; the local economic conditions impacting business operations; the ability of such major tenants to compete with their competitors; where such major tenants have sub-leased the Property, the failure of the subtenants to pay rent; and material losses in excess of insurance proceeds. RISKS RELATING TO THE REAL ESTATE INDUSTRY The real estate industry may be adversely affected by laws and regulations The real estate industry is subject to extensive governmental regulations. As with other property owners in the PRC, Spring REIT must comply with various requirements mandated 41

49 RISK FACTORS by the PRC laws and regulations, including the policies and procedures established by local authorities designed for the implementation of such laws and regulations. In particular, the PRC Government exerts considerable direct and indirect influence on the development of the PRC real estate sector by imposing industry policies and other economic measures, such as control of foreign exchange, taxation, financing and foreign investment. Among other things, these measures include raising benchmark interest rates of commercial banks, placing additional limitations on the ability of commercial banks to make loans to property developers, imposing additional taxes and levies on property sales, restricting foreign investment in the PRC property sector and restricting domestic individuals to purchase properties in some cities in China. For additional information on the PRC laws and regulations relating to the real estate market, please refer to Appendix VI to this Offering Circular. Many of the real estate industry policies carried out by the PRC Government are unprecedented and are expected to be refined and improved over time. This refining and adjustment process may not necessarily have a positive effect on Spring REIT s operations and future business development. The REIT Manager cannot assure that the PRC Government will not adopt additional and more stringent industry policies and regulations in the future. If Spring REIT fails to adapt its operations to comply with new policies and regulations that may come into effect from time to time with respect to the real estate industry, or such policy changes disrupt Spring REIT s business prospects or cause Spring REIT to incur additional costs, Spring REIT s business, financial condition, results of operations and prospects may be adversely affected. Spring REIT may be adversely affected by the illiquidity of property investments Spring REIT invests solely in real property, which entails a higher level of risk than a portfolio which has a diverse range of investments. Property investments, particularly investments in high value properties such as those in which Spring REIT may from time to time consider to invest, are relatively illiquid. In particular, the market for acquiring or disposing of office building properties has historically not been very active in Beijing and is affected by many factors, such as general economic conditions, availability of financing, interest rate and other factors, including supply and demand, that are beyond Spring REIT s control. In addition, office buildings may not readily be converted to alternative uses if they were to become unprofitable due to competition, age, decreased demand or other factors. The conversion of an office building to a building with an alternative use would also generally require substantial capital expenditures. Such factors, together with the fact that the lease agreements usually continue following a sale of an office building property, may limit the number of possible purchasers, thus affecting the ability of Spring REIT to dispose of its indirect interest in the Property when required or considered desirable to do so. The divestment of Spring REIT s interest in the Property may include, but is not limited to, a disposal of Spring REIT s shareholding in RCA01 or a direct sale of the Property held by RCA01. The PRC Legal Advisor has confirmed that, given that Spring REIT will have valid ownership of all of the issued shares in RCA01 upon Completion and RCA01 has valid and marketable title to the Property, there are no restrictions or regulatory approval requirements under PRC laws that may impede or restrict the sale of Spring REIT s shareholding in RCA01 or the sale of the Property by RCA01 (except that RCA01 must obtain written consent from the mortgagee of the Property or discharge the mortgage over the Property prior to such sale). However, given that the underlying asset of Spring REIT is a real estate asset, Spring REIT s ability to promptly sell its interest in RCA01 or to vary its investment portfolio in response to changing economic, financial and investment conditions may be limited. For example, Spring REIT may be unable to liquidate its assets on short notice or may be 42

50 RISK FACTORS required to substantially reduce the price that may otherwise be sought for such assets, to ensure a quick sale. In addition, under the REIT Code, Spring REIT is prohibited from disposing of its properties for at least two years from the time such properties are acquired, unless the rationale of the sale has been clearly communicated to Unitholders and a Special Resolution passed to consent to such sale. Further, Spring REIT and RCA01 may face difficulties in securing timely and commercially acceptable financing in asset-based lending transactions secured by real property due to the illiquid nature of real estate assets. These factors could have a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects, with a consequential adverse effect on Spring REIT s ability to make expected distributions to Unitholders. Spring REIT may suffer material losses not covered by insurance or in excess of insurance proceeds The Property could suffer physical damage caused by fire or other causes and Spring REIT or RCA01 may suffer public liability claims, resulting in losses (including loss of rent), which may not be fully compensated for by insurance proceeds. In addition, Spring REIT has not obtained insurance covering certain types of losses, such as losses from war and nuclear contamination. Should an uninsured loss or a loss in excess of insured limits occur, Spring REIT or RCA01 could be required to pay compensation and/or lose the capital invested in the Property as well as anticipated future revenue from the Property. Nonetheless, Spring REIT or RCA01 would remain liable for any debt or other financial obligation, such as committed capital expenditures, related to the Property. It is also possible that third-party insurance carriers will not be able to maintain reinsurance sufficient to cover any losses that may be incurred. Any material uninsured loss could materially adversely affect Spring REIT s business, financial condition, results of operations and prospects. In addition, when its current insurance policies expire, Spring REIT will have to seek renewal of the policies and negotiate acceptable terms for coverage, exposing it to the volatility of the insurance markets, including the possibility of increased premiums. The REIT Manager will regularly monitor the state of the insurance market, but it cannot anticipate what coverage will be available on commercially reasonable terms in future policy years. Any material increase in insurance premiums or decrease in available coverage in the future could adversely affect Spring REIT s business, financial condition and results of operations. Spring REIT may incur significant costs or liabilities related to environmental matters Spring REIT s operations are subject to various environmental laws, including those relating to air pollution control, water pollution control, waste disposal, noise pollution control, fire services control and the storage of dangerous goods. Under these laws, an owner or operator of real property may be subject to liability, including a fine or imprisonment, for air pollution, noise pollution or the presence or discharge of hazardous or toxic chemicals at that property. In addition, Spring REIT may be required to incur capital expenditures to comply with these environmental laws. The presence of any contamination, air pollution, noise pollution or dangerous goods without a valid license or the failure to remedy contamination, air pollution, noise pollution or dangerous goods or non-compliance with fire services control measures may expose Spring REIT to liability or materially adversely affect its ability to lease the real property or to borrow using the real property as collateral, which may materially adversely affect the business, financial condition, results of operations and prospects of Spring REIT. 43

51 RISK FACTORS There is uncertainty about the amount of the land grant premium which Spring REIT will have to pay and additional conditions which may be imposed if the REIT Manager decides to seek an extension of the land use rights for the Property upon expiration in 2053 of the current land use rights and there can be no assurance that such extension will be obtained as there are currently no precedents for any such extension The Property is held by RCA01 under a land use right granted by the PRC Government for a 50-year term expiring in Upon the expiration of such term, the land use right as well as the ownership of the Property (including all buildings and structures situated on the land) will revert to the PRC Government unless the land user applies for an extension of the term of the land use right. If such an application is granted, the holder of the land use rights will be required, among other things, to pay a land grant premium. As none of the land use rights granted by the PRC Government to date has run their full term, there is no precedent to provide any indication of the amount of land grant premium which Spring REIT will have to pay and additional conditions which may be imposed if the REIT Manager decides to seek an extension of the land use right for the Property upon the expiration thereof, or if an extension would be granted at all. In addition to the potential impact at the time of expiration in 2053, this uncertainty may also adversely affect the value of the Property and the willingness of lenders to accept a charge over the Property as security for borrowings by Spring REIT. As a result, the business, financial condition, results of operations and prospects of Spring REIT may be materially adversely affected. RISKS RELATING TO THE PRC The PRC Government has implemented property control measures in relation to the PRC property market To discourage speculation in the PRC property market, the PRC Government has implemented a variety of control measures. To date, the PRC Government has placed emphasis on regulating investments in the residential property market. However, there can be no assurance that the PRC Government will not extend such control measures to regulate the commercial property market. Although the various control measures are intended to promote more balanced property developments in the long term, these measures could adversely affect the demand for the Property if extended to the commercial property market. In addition, there is no assurance that the PRC Government will not introduce additional measures from time to time to regulate the growth of the PRC property market. The extension of the existing measures and the introduction of any new measures may materially and adversely affect Spring REIT s business, financial condition, results of operations and prospects. Changes in the political, economic and social conditions in the PRC may have a material adverse effect on Spring REIT s financial condition and results of operations The political, economic and social conditions in the PRC differ from those in most developed countries in many respects, including: (i) economic and political structure; (ii) level of development; (iii) growth rate; (iv) control of foreign exchange; and (v) allocation of resources. While the PRC Government has implemented economic reform measures emphasizing utilization of market forces in the development of the PRC economy and the PRC economy has experienced significant growth in the past 30 years, growth has been uneven, both 44

52 RISK FACTORS geographically and among different sectors of the economy. In addition, the PRC Government continues to regulate industries development by imposing top-down policies and control over the PRC s economic growth through various means such as the allocation of resources, monetary policy, control over foreign currency denominated payment obligations and the provision of preferential treatment to particular industries and companies. The REIT Manager cannot predict whether changes in the PRC s political, economic and social conditions will have any material adverse effect on Spring REIT s business, financial condition, results of operations or prospects. RMB is not a freely convertible currency and the PRC Government s control of foreign currency conversion may limit Spring REIT s foreign exchange transactions including distributions to Unitholders The revenue received from the Property is denominated in RMB, which will have to be converted into (i) U.S. dollars to make principal and interest payments under the Term Loan Facility and (ii) Hong Kong dollars for distribution payments to the Unitholders. Conversion of RMB is subject to strict government regulation in the PRC. Under the existing foreign exchange regulations in the PRC, rental income received by RCA01 may be converted into foreign currency without the requirement for further approval from SAFE subject to compliance with certain procedural requirements and the payment of relevant PRC taxes by RCA01. There is no assurance that the government policies regarding conversion of RMB into foreign currencies will continue in the future. In addition, RMB proceeds originating from the Property can only be converted into foreign currencies and remitted offshore after complying with the relevant administrative procedures, which include, among other things, the presentation of tax filing forms affixed with the seal of the PRC tax authorities and lease agreements. As advised by the PRC Legal Advisor, there are no legal or other impediments for RCA01 to exchange RMB proceeds originating from the Property into foreign currencies and to remit them outside the PRC, provided that such remittance is made in accordance with the administrative procedures set out under the relevant PRC laws. If such governmental policies, or the manner in which they are applied, are changed or if tax filing forms cannot be obtained from the PRC tax authorities in a timely manner, RCA01 s ability to make principal and interest payments under the Term Loan Facility may be limited, which may have a material adverse effect on Spring REIT s business, financial condition, results of operations or prospects, or limit Spring REIT s ability to make distribution payments to the Unitholders. In the event that a problem arises in the future with respect to the repatriation of proceeds originating from the Property out of the PRC, the REIT Manager will consider an alternative arrangement at the time, including credit facilities or the establishment of reserves, in order to meet its obligation to make distributions on a timely basis. Interpretation of PRC laws and regulations involves uncertainty As the Property is located in the PRC, its operation is governed principally by laws and regulations in the PRC. The PRC legal system is based on written statutes and prior court decisions are not binding on the PRC courts. Since 1979, the PRC Government has promulgated laws and regulations in relation to economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade, with a view to developing a comprehensive system of commercial law. However, as these laws and regulations are continually evolving in response to changing economic and other conditions and because of the limited volume of published cases and their non-binding nature, any particular interpretation of the PRC laws and regulations may not be definitive. 45

53 RISK FACTORS The land and real estate laws of the PRC, including laws relating to land title and building ownership and laws applicable to landlords and tenants, are still under development and reform. In recent years, the National People s Congress, the State Council, the Ministry of Land and Resources and the Ministry of Housing and Urban-Rural Development have promulgated a number of laws and regulations and departmental rules relating to legal problems in respect of land and real estate. In addition, the local people s congresses and local governmental authorities in many provinces and cities have also promulgated various local regulations and rules. There may be uncertainties in the interpretation and application of these laws, regulations, departmental rules and local regulations and rules, which may have a material adverse effect on Spring REIT s business, financial condition, results of operations and prospects. The building standards applicable in the PRC may become more stringent and Spring REIT may incur significant costs to ensure conformity with such amended standards The Property has passed the examination process and obtained completion certifications certifying that it can be handed over for occupation or use in accordance with the building standards that currently apply to the Property. However, the building standards that apply to the Property, or that would have applied to the Property were it built in the future, may become more stringent in the future. There can be no assurance that the Property will remain in conformity with the latest building standards from time to time in the PRC. Compliance with the latest amended building standards may be required retrospectively, which could entail significant costs for Spring REIT. In addition, if the Property does not meet the most recent requirements for building standards and materials, it may be less desirable than developments which have been built in accordance with the latest standards, which may affect the ability to sell or let the Property and consequently may materially affect the business, financial condition, results of operations and prospects of Spring REIT. The PRC s political policies and foreign relations could affect the Property Investment in properties in the PRC entails risks of a nature and degree not typically encountered in property investments in developed markets. In the PRC, there is a high risk of nationalization, expropriation, confiscation, punitive taxation, currency restriction, political changes, government regulation, political, economic or social instability or diplomatic developments which could adversely affect the value of investments made in the PRC, including the Property, and for which Spring REIT may not be fairly compensated. RISKS RELATING TO AN INVESTMENT IN THE UNITS The sale or possible sale of a substantial number of Units by RCA Fund and/or any of the transferees of its Units (following the expiry of the applicable lock-up arrangements) in the public market could have adverse effects on the Unit price of Spring REIT Following the Global Offering, Spring REIT will have 1,098,000,000 Units in issue, of which 658,500,000 Units will be held by RCA Fund, assuming the Over-allotment Option is not exercised. If RCA Fund and/or any of the transferees of its Units (following the expiry of the applicable lock-up arrangements) sells or is perceived as intending to sell a substantial number of its Units, the market price for the Units could be adversely affected. 46

54 RISK FACTORS The Units have never been publicly traded and the Global Offering may not result in an active or liquid market for the Units Prior to the Global Offering, there has been no public market for the Units and an active public market for the Units may not develop or be sustained after the Global Offering. Although the Units will be listed on the Hong Kong Stock Exchange following the completion of the Global Offering, this does not guarantee that a trading market for the Units will develop or, if a market does develop, the liquidity of that market. The REIT Manager is required under the Trust Deed to use best efforts to ensure that a minimum of 25% (or such other percentage specified or permitted by the SFC from time to time) of the outstanding Units are held by the public. There can be no assurance as to the percentage of Units which will be held by the public or as to the number of Unitholders in Spring REIT at any time. An investment in the Units presents taxation risk Spring REIT, as a collective investment scheme constituted as a unit trust and authorized under section 104 of the SFO, is exempt from Hong Kong profits tax, although the Property is subject to taxation in the PRC. Any change in the tax status of Spring REIT, RCA01 or any other entities which are controlled by Spring REIT, or in taxation legislation in the PRC, Hong Kong or the Cayman Islands generally or any other jurisdiction affecting the Unitholders could affect the value of the investments held by Spring REIT or affect Spring REIT s ability to achieve its investment objectives or alter after-tax returns to the Unitholders. REITs in Hong Kong may differ in significant aspects, including tax treatment, from REITs in other jurisdictions. If there is any doubt as to tax position, investors should consult their own tax advisors. Unitholders will be structurally subordinated to all existing and future claims of creditors of RCA01 The claims of creditors of RCA01 will have priority to the assets of RCA01 over the claims of Spring REIT (other than to the extent that Spring REIT is an unsubordinated creditor of RCA01). RCA01 has incurred indebtedness under the Term Loan Facility and such indebtedness is secured against certain assets of RCA01 including its interest in the Property. In addition, RCA01 may in the future incur additional secured or unsecured indebtedness. Secured creditors of RCA01 would have prior rights of claim over the secured assets to other creditors of RCA01, and all creditors of RCA01 would rank ahead of the claims of Spring REIT (other than to the extent that Spring REIT is an unsubordinated creditor of RCA01). Unitholders have no right to require the redemption of their Units Unitholders have no right to require the redemption of their Units. Therefore, there can be no assurance that a Unitholder will be able to dispose of its Units at the Offer Price or any price, or at all. Accordingly, Unitholders may only be able to liquidate or dispose of their Units through a sale of such Units to third parties on the secondary market. The price of the Units may decline after the Global Offering The Offer Price of the Units will be determined by agreement between the REIT Manager, RCA Fund and the Sole Global Coordinator (on behalf of the Underwriters) and may not be indicative of the market price for the Units after completion of the Global 47

55 RISK FACTORS Offering. The Units may trade at prices significantly below the Offer Price after the Global Offering and the price of the Units may be volatile. The price of the Units will depend on many factors, which may change from time to time, including but not limited to: (i) the perceived prospects of Spring REIT s business and investments and the PRC real estate market; (ii) differences between Spring REIT s actual financial and operating results and those expected by investors and analysts; (iii) changes in Spring REIT s revenues or earnings estimates or analysts recommendations or projections; (iv) changes in general economic or market conditions both domestically and internationally; (v) the market value of Spring REIT s assets; (vi) changes in market valuations of similar companies; (vii) increases in interest rates; (viii) the perceived attractiveness of the Units against those of other equity securities, including those not relating to the real estate sector; (ix) the future size and liquidity of the market for the Units and the Hong Kong REIT market generally; (x) any future changes to the regulatory system, including the tax system, both generally and specifically in relation to Hong Kong REITs and owners and operators of property in Beijing or elsewhere; (xi) the ability on Spring REIT s part to implement successfully its investment and growth strategies and to retain its key personnel; and (xii) broad market fluctuations, including weakness of the equity market and increases in interest rates. For these reasons, among other things, Units may trade at prices that are higher or lower than the attributable net asset value per Unit. If Spring REIT retains operating cash flow for investment purposes, as working capital reserves or for other purposes, these retained funds, while increasing the value of its underlying assets, may not correspondingly increase the market price of the Units. Any failure on Spring REIT s part to meet market expectations with regard to future earnings and cash distributions may adversely affect the market price for the Units. In addition, there is no guarantee provided to investors. Unitholders may not get back their full investment amount. If Spring REIT is terminated or liquidated, it is possible that investors may lose all or a part of their investment in the Units. The forward-looking and certain other information in this Offering Circular may prove inaccurate This Offering Circular contains forward-looking statements regarding, among other things, forecast of net profits and distribution levels for the period from the Listing Date to December 31, These forward-looking statements are based on a number of assumptions regarding the REIT Manager s strategies and environment in which Spring REIT or the REIT Manager will operate in the future, which are subject to significant uncertainties and contingencies, many of which are outside of Spring REIT s control. Moreover, Spring REIT s revenue is dependent on a number of factors, including the ability of the REIT Manager to fully implement its strategies, the receipt of dividends and distributions, directly or indirectly, from RCA01 as well as rent from the Property. Such rent, dividends and distributions may decrease for a number of reasons, including the lowering of occupancy and rental rates, and insolvency or delay in rent payment by tenants, which may adversely affect Spring REIT s ability to achieve the forecasted distributions as some or all events and circumstances assumed may not occur as expected, or events and circumstances which are not currently anticipated may arise. Because such statements and financial information reflect the REIT Manager s current view concerning future events, such statements and financial information necessarily involve risks, uncertainties and assumptions. These statements speak only as of the date they are made and reflect only the REIT Manager s views as at that time and the REIT Manager undertakes no obligation to update them in light of new information, circumstances or future developments. While the REIT Manager has no reason to doubt the reasonableness of its assumptions on which the forward-looking 48

56 RISK FACTORS statements are based, there are known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Spring REIT or the REIT Manager to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements and financial information. Property yield on real estate to be held by Spring REIT is not equivalent to yield on the Units Generally, property yield depends on net property income and is calculated as the amount of revenue generated by the properties, less the expenses incurred in maintaining, operating, managing and leasing the properties compared against the current value of the properties. Distribution yield on the Units, however, depends on the distributions payable on the Units, after taking into account other expenses including (i) taxes, (ii) interest cost for any debt facilities, (iii) REIT management fees and trustee s fees and (iv) other operating costs including administrative fees of Spring REIT and RCA01, as compared with the purchase price of the Units. The NAV per Unit will be diluted if further issues are priced below the NAV per Unit The Trust Deed contemplates new issues of Units, the offering price for which may be above, at or below the then current NAV per Unit. The distribution per Unit may be diluted if new Units are issued and the use of proceeds from such issue of Units generates insufficient cash flow to cover the dilution. Unitholders interests will be diluted because all or part of the REIT Manager s compensation may be paid in Units All or part of the REIT Manager s compensation may be paid in Units in lieu of cash, in which event Unitholders will experience dilution in their holdings of Units. In addition, if at the time of a payment in the form of Units to the REIT Manager, the issue price of the Units is below Spring REIT s NAV, Unitholders will experience further dilution. See the section headed The REIT Manager Fees, Costs and Expenses of the REIT Manager in this Offering Circular. Certain rights in relation to Units in which a person has an interest or is deemed to have an interest may be suspended under the provisions of the Trust Deed The Trust Deed contains provisions that require relevant persons to disclose to the REIT Manager information in relation to the acquisition or disposal of interests in the Units. If the REIT Manager believes a person has not complied with such disclosure of interest provisions in the Trust Deed, irrespective of whether such person is a holder of Units, the REIT Manager may, in its absolute discretion, take certain actions in respect of all or a part of the Units in which such person holds or is deemed to hold an interest. Such actions may include suspending the voting rights of such Units, suspending the payment of distributions on such Units, imposing an administrative fee for such non-compliance, suspending the registration and/or declining to register any transfer of such Units. 49

57 RISK FACTORS The Units may be delisted from the Hong Kong Stock Exchange The Hong Kong Stock Exchange imposes certain requirements for the continued listing of securities, including the Units, on the Hong Kong Stock Exchange. Investors cannot be assured that Spring REIT will continue to meet the requirements necessary to maintain the listing of Units on the Hong Kong Stock Exchange or that the Hong Kong Stock Exchange will not change the listing requirements. Spring REIT may be terminated if the Units are delisted from the Hong Kong Stock Exchange. Certain laws, rules and regulations affecting companies listed on the Hong Kong Stock Exchange do not generally apply to REITs listed on the Hong Kong Stock Exchange or to holdings of Units and only limited information may be available in relation to the interests held by significant holders and other connected persons of Spring REIT Unitholders rights differ from, and may be less protected in certain respects than, those granted to shareholders of companies listed on the Hong Kong Stock Exchange, as more fully described below. Although the REIT Code contains provisions which are intended to address certain issues under the listing rules of the Hong Kong Stock Exchange, not all listing rules apply to REITs, including Spring REIT, as such entities are not listed issuer(s) within the meaning of those rules. For example, in accordance with the REIT Code, interests in Units held by connected persons of Spring REIT are required to be disclosed in the annual report of Spring REIT. However, as the SFO does not state that the rules on disclosure of interests set out in Part XV of the SFO apply to Units, and the provisions of the Trust Deed requiring Unitholders to disclose their interests in Spring REIT do not have the force of law, this may render it difficult for the REIT Manager to enforce such provisions. Spring REIT cannot be privatized by way of the scheme of arrangement or compulsory acquisition mechanisms provided under the Companies Ordinance Spring REIT is not a company and the Companies Ordinance (Chapter 32 of the Laws of Hong Kong) is not applicable to Spring REIT. Therefore, the scheme of arrangement mechanism and the compulsory acquisition mechanism as provided under the Companies Ordinance which may be used to privatize a company listed on the Hong Kong Stock Exchange and to which the Companies Ordinance applies cannot be used to privatize Spring REIT. Unitholders may be unable to recover in claims brought against the REIT Manager as the REIT Manager is not an entity with significant assets Unitholders may in the future have claims against the REIT Manager in connection with the carrying on of its duties as manager of Spring REIT (including in relation to the Global Offering and this Offering Circular). Under the terms of the Trust Deed, the REIT Manager is entitled to be indemnified out of and have recourse to the Deposited Property against any action, cost, claim, expense or demand to which it may be put as the manager of Spring REIT unless occasioned by the fraud, negligence, willful default or breach of the Trust Deed by the REIT Manager. To the extent that a claim is made by Unitholders against the REIT Manager in respect of the fraud, negligence, willful default or breach of the Trust Deed by the REIT Manager, Unitholders may 50

58 RISK FACTORS be unable to recover significant damages or any damages as the REIT Manager is not an entity with significant assets. The Trustee may retire or be removed in the future, which may have an adverse effect on the management and operation of Spring REIT The Trustee may retire or be removed in the future. Although, pursuant to the REIT Code, the Trustee shall not retire except upon the appointment of a new trustee whose appointment has been approved by the SFC and the retirement of the Trustee shall take effect at the same time as the new trustee takes up office, such retirement of the Trustee may incur disruption to the regular management and operation of Spring REIT. For more details on the retirement and removal of the Trustee, please refer to the section headed The Trust Deed and Related Matters in this Offering Circular. There is no assurance that the new trustee will be found and appointed in a timely manner or the terms of the new trust deed will be the same or similar to the current Trust Deed. 51

59 USE OF PROCEEDS The REIT Manager estimates that the total proceeds from the Global Offering, comprising the total proceeds to Spring REIT from the offering of New Units and the total proceeds to the Selling Unitholder from the offering of the Sale Units, will be approximately HK$1,771 million (based on the Maximum Offer Price), and approximately HK$1,674 million (based on the Minimum Offer Price), assuming the Over-allotment Option is not exercised. The REIT Manager estimates that (i) the total proceeds to Spring REIT from the offering of New Units in the Global Offering will be approximately HK$395 million (based on the Maximum Offer Price), and approximately HK$373 million (based on the Minimum Offer Price) and (ii) the total proceeds to the Selling Unitholder from the offering of the Sale Units in the Global Offering will be approximately HK$1,376 million (based on the Maximum Offer Price), and approximately HK$1,301 million (based on the Minimum Offer Price), assuming the Over-allotment Option is not exercised. The following table sets forth the sources of Spring REIT s funds following the completion of the Global Offering and the intended application of those funds. Based on the Minimum Offer Price of HK$3.81 Based on the Maximum Offer Price of HK$4.03 (HK$ million) Sources of funds: 98,000,000 New Units issued pursuant to the Global Offering Uses of funds: Repayment of part of the Term Loan Facility Underwriting commissions (1) Total Note: (1) All costs and expenses related to the Global Offering, including underwriting commissions payable to the Underwriters (based on the final Global Offering size), legal fees, printing costs, auditors fees, listing costs, advertisement and marketing related expenses and other administrative expenses, will be paid by RCA Fund. Approximately 22.3% of the total estimated underwriting commission, which represents the approximate portion of New Units to be issued and offered by Spring REIT in the Global Offering, will be reimbursed by Spring REIT to RCA Fund after the Listing. Under the International Underwriting Agreement, as the Over-allotment Option is expected to be granted by RCA Fund to the International Underwriters, the underwriting commission and expenses (including, but not limited to, stamp duty, Hong Kong Stock Exchange trading fee and SFC transaction levy) as a result of the exercise of the Over-allotment Option will be borne by RCA Fund. 52

60 OWNERSHIP OF AND INTEREST IN UNITS OWNERSHIP OF AND INTEREST IN UNITS So far as the Directors are aware, except for RCA Fund, no person will, upon immediate completion of the Global Offering, hold an interest in 5% or more of the issued Units. The table below sets out the number and percentage of Units expected to be held or, pursuant to Part XV of the SFO (which, except sections 328 and 351 thereof, will be taken to have effect after the Listing Date, under the terms of the Trust Deed), deemed to be interested in, by RCA Fund and the Public Unitholders upon completion of the Global Offering: Upon completion of the Global Offering assuming no exercise of the Over-allotment Option % of total Units No. of Units in issue Upon completion of the Global Offering assuming full exercise of the Over-allotment Option % of total Units No. of Units in issue RCA Fund (1)(2) ,500, % 592,575, % Public Unitholders ,500, % 505,425, % Total... 1,098,000, % 1,098,000, % Notes: (1) RCAC, in its capacity as general partner of RCA Fund, holds such Units on behalf of RCA Fund. All of the issued shares in RCAC are fully paid and are held by MaplesFS Limited as share trustee under the terms of a declaration of trust dated December 23, (2) RCA Fund intends to make a distribution in cash or a distribution in-specie of Units to its limited partners approximately one month after the completion of the Global Offering. If RCA Fund elects to make a distribution in-specie of Units to its limited partners, some of its limited partners may hold an interest in 5% or more of the issued Units. See the section headed Information About RCA Fund in this Offering Circular for further details. None of the Directors will be interested (for the purposes of the disclosure requirements under the REIT Manager s Compliance Manual) in the Units immediately upon listing of the Units. 53

61 DISTRIBUTION POLICY Distributions to Unitholders will, subject to compliance with applicable legal and regulatory requirements, be declared and paid in Hong Kong dollars. The REIT Manager s policy is to distribute to Unitholders an amount of no less than 90% of Spring REIT s Annual Distributable Income for each financial year. For these purposes, and under the terms of the Trust Deed, Annual Distributable Income for a financial year is the amount calculated by the REIT Manager (based on the audited financial statements of Spring REIT for that financial year) as representing the consolidated audited net profit after tax of Spring REIT and the Special Purpose Vehicles for that financial year, as adjusted for the Adjustments (as defined below), except that the Annual Distributable Income for 2013 will be calculated based on the consolidated audited net profit after tax of Spring REIT and the Special Purpose Vehicles for the period from the Listing Date to December 31, After eliminating the effects of these Adjustments, Annual Distributable Income may be different from the net profit recorded for the relevant financial year. Adjustments means adjustments to certain items which are charged or credited to the consolidated profit and loss account for the relevant financial year or the relevant distribution period, as the case may be, including: (i) unrealized property revaluation gains/losses, including impairment provisions and reversals of impairment provisions; (ii) impairment loss of goodwill/recognition of negative goodwill; (iii) differences between cash and accounting finance costs; (iv) realized gains on the disposal of properties; (v) fair value changes on financial instruments; (vi) deferred tax charges/credits in respect of property valuation movements, commercial building allowances/capital allowances and other tax deductions claimed; (vii) the portion of the REIT Manager s fees that are paid in the form of Units; (viii) noncash foreign exchange gains or losses; (ix) costs of any public offering of Units that are expensed through the income statement but are funded by proceeds from the issuance of such Units; (x) depreciation and amortization in respect of real estate directly or indirectly owned by Spring REIT; and (xi) other material non-cash gains /losses. Based on and in sole reliance upon the information and assurances provided by the REIT Manager, and having regard to the minimum distribution requirement expressed in paragraph 7.12 of the REIT Code, the Trustee s duties under REIT Code and the Trustee s fiduciary duties, the Trustee has no objection to the definition of Adjustments as described above. The REIT Manager also has the discretion to direct the Trustee from time to time to make distributions over and above the minimum 90% of Annual Distributable Income if and to the extent Spring REIT, in the opinion of the REIT Manager, has funds surplus to its business requirements, provided that no amount of revaluation surplus on real estate credited to income, or gains on disposal of real estate, whether directly or indirectly through the disposal of any Special Purpose Vehicle, shall form part of any distribution to Unitholders unless the REIT Manager shall have obtained the Trustee s prior consent. The REIT Manager currently intends to distribute 100% of the Annual Distributable Income for the period from the Listing Date to December 31, 2013 and 100% of the Annual Distributable Income for the financial year ending December 31, Under the Trust Deed, the REIT Manager will, subject to applicable law, endeavor to ensure that at least one distribution shall be made in respect of each financial year and paid no later than five months after the distribution calculation date for the relevant distribution period. Spring REIT s first distribution after the Listing Date will comprise (i) the distribution for the FY2013 Distribution Period, namely, from and including the Listing Date to December 31, 2013 and (ii) the interim distribution for the first six months of 2014, which will be paid together no later than November 30,

62 DISTRIBUTION POLICY Spring REIT s initial distribution policy is that two distributions will be made in respect of each year, being distributions with respect to the six-month period ending June 30 and December 31. The Directors anticipate that interim and final distributions will be paid by the end of November and May in each year, respectively. The REIT Manager may also adopt such rules as it considers appropriate for the reinvestment by Unitholders of any distributions to be made by Spring REIT in return for new Units but no Unitholder shall be obliged to receive Units in lieu of a cash distribution. Under current Hong Kong tax law, distributions may be made free of withholdings or deductions on account of Hong Kong tax. It is understood that, under the Hong Kong Inland Revenue Department s current practice, Hong Kong profits tax will not be payable by a Unitholder on distributions made by Spring REIT. However, Unitholders should take advice from their own professional advisors as to their particular tax position. Distributions to Unitholders will be declared and paid in Hong Kong dollars. Spring REIT s ability to make distributions is dependent on, among other things, the Trustee having available sufficient cash in Spring REIT to make the payments required. If the Trustee does not have sufficient cash to make payment of distributions, Spring REIT may be required to obtain financing to satisfy the payment of distributions to Unitholders. See the section headed Risk Factors Risks Relating to Spring REIT Spring REIT will operate principally through its interest in RCA01 and relies on income earned from the Property to make distributions and there are various risks relating to RCA01 s ability to make distributions. Spring REIT may not be able to make distributions to Unitholders in a timely manner or at all or the level of distributions may fall in this Offering Circular. The REIT Code requires the REIT Manager and the Trustee to ensure that each company used to hold real estate and other assets for Spring REIT for the time being shall distribute to Spring REIT all of such company s income for each financial year as permitted by the laws and regulations of its relevant jurisdiction of incorporation. In addition, the revenue received from the Property is denominated in RMB, which will have to be converted into Hong Kong dollars for distribution payments to the Unitholders. Conversion of RMB is subject to strict government regulation in the PRC. Under the existing foreign exchange regulations in the PRC, rental income received by RCA01 may be converted into foreign currency without the requirement for further approval from SAFE subject to compliance with certain procedural requirements and the payment of relevant PRC taxes by RCA01. As advised by the PRC Legal Advisor, there are no legal or other impediments for RCA01 to exchange RMB proceeds originating from the Property into foreign currencies and to remit them outside the PRC, provided that such remittance is made in accordance with the procedures set out under the relevant PRC laws. However, there is no assurance that the government policies regarding conversion of RMB into foreign currencies will continue in the future. See the section headed Risk Factors Risks Relating to the PRC RMB is not a freely convertible currency and the PRC Government s control of foreign currency conversion may limit Spring REIT s foreign exchange transactions including distributions to Unitholders in this Offering Circular. Spring REIT may make distributions out of capital. The composition of distributions declared by Spring REIT (including, but not limited to, the extent to which the distribution declared or made is composed of, and the types of, income and capital) shall be determined by the REIT Manager in its absolute discretion and will be disclosed in the relevant results announcements, semi-annual reports and annual reports of Spring REIT. 55

63 DISTRIBUTION POLICY For information on the forecast distributions for the period from the Listing Date to December 31, 2013, see the section headed Financial Information and Forecast Statement of Distributions in this Offering Circular. RCA01 paid a distribution, by way of a dividend, of US$15 million to RCA Fund on November 15, See the section headed Financial Information and Forecasts Management s Discussion and Analysis of Financial Condition and Results of Operations Recent Developments in this Offering Circular for details. 56

64 INVESTMENT HIGHLIGHTS Spring REIT is a real estate investment trust formed primarily to own and invest in high quality income-producing real estate in Asia. The key objectives of the REIT Manager for Spring REIT are to provide Unitholders with stable distributions and the potential for sustainable long-term growth in the distributions and enhancement in the value of the real estate assets. Spring REIT is the first REIT to offer investors direct exposure to two Premium Grade office buildings located in the CBD of Beijing. Spring REIT will initially invest in and own the Property through its ownership of RCA01, which holds the land use rights and building ownership rights in respect of the Property. The Property comprises all of the office floors of Office Tower 1 (including Levels 4 to 28, and the equipment and emergency shelter floor on Level 16, which contains no lettable space) and Office Tower 2 (including Levels 4 to 32, and the equipment and emergency shelter floor on Level 20, which contains no lettable space) in China Central Place and a total of approximately 600 car parking spaces located in the underground levels of the two office buildings. The Property is part of China Central Place ( ), a prime mixed-use development complex in Beijing. China Central Place has a total GFA of approximately 910,000 sq.m., and comprises: Three Premium Grade office buildings, including Office Tower 1 and Office Tower 2 which comprise the Property ( ); Shin Kong Place ( ), one of the largest department stores in China by sales, and other shopping areas in China Central Mall ( ), China Central Square and China Central Commercial Street; The Ritz-Carlton Hotel Beijing ( ) and JW Marriott Hotel Beijing ( JW ), both five-star luxury hotels with a total of approximately 900 guest rooms; Residential and serviced apartment buildings and a clubhouse; and Approximately 3,600 car parking spaces, including a total of approximately 600 car parking spaces owned by Spring REIT. The REIT Manager believes that Spring REIT presents Unitholders with an attractive investment proposition as described below. Exposure to Premium Grade office buildings located in the CBD of Beijing The Property is one of the most highly regarded Premium Grade office properties in Beijing. By DTZ s definitions, Premium Grade office buildings form a subset of Grade A office buildings with the highest quality standards of any office building. A Premium Grade office building is distinguished from a general Grade A office building by a number of features, including the location, supply of car parking spaces, building quality and standard of finish, provision and service of elevators and single ownership structure. Offices in Premium Grade office buildings generally command higher unit rents than offices in buildings with lower classifications. Based on DTZ s definitions, there are a total of 10 Premium Grade office properties in the CBD of Beijing. The Property is located in the southeast corner of Beijing s traditional CBD and the central core area of the expanded CBD. The CBD is traditionally a hub for international business and activities and home to the PRC headquarters of many Fortune 500 companies and multi-national corporations. The REIT Manager believes that one of the main drivers 57

65 INVESTMENT HIGHLIGHTS behind multi-national corporations choosing Beijing over Shanghai and other cities in the PRC as their PRC headquarters is due to its proximity to the PRC State-level government authorities. The Property has good accessibility. It is bordered on the east by the Fourth Ring Road ( ) and exits directly onto Chang an Avenue ( )/Jianguo Road ( ) in front of the Property. Chang an Avenue ( )/Jianguo Road ( ) is the main east-west artery in Beijing. Along the west, the Property is bordered by West Dawang Road ( ), a six-lane throughway, which runs north-south between mostly residential neighborhoods. It is approximately 7 km away from the Tian anmen Square and 20 km away from the Beijing Capital International Airport. The Property has direct access to Subway Line 1 Dawanglu Station through the shopping mall in the underground, and will also be directly connected to Subway Line 14, construction of which is expected to be completed in The Property s location allows tenants and visitors to avoid the heavy traffic congestion in the China World Trade Center intersection in the center of the traditional CBD and at the same time enjoy convenient accessibility to public transportation facilities. The REIT Manager believes that the Property s convenient location is one of the most important advantages the Property has over other Premium Grade office buildings in the CBD. The Property, together with Office Tower 3 at China Central Place, has won numerous awards, including: Top 20 Office Buildings in China jointly by ( ), China Office Building Industry Association ( ) and Nanfeng Think Tank ( ) in 2012; Model Business Service Building in Beijing ( ) by Beijing Municipal Commission of Commerce ( ) in 2012; and National Construction Decoration Design Award ( ) by China Building Decoration Association ( ) in The Property is able to benefit from being part of China Central Place ( mixed-use complex in Beijing and a well recognized brand ), a prime The Property is part of China Central Place, a prime mixed-use development complex in Beijing. The REIT Manager believes that the Property benefits from the synergies between the different components of the China Central Place complex as tenants and visitors to the Property are able to enjoy a wide range of facilities in the same complex within close proximity to each other. The status of China Central Place also reinforces the positioning of the Property as a leading Premium Grade office development in the CBD and helps to promote the business of the Property. The office buildings and shopping malls in China Central Place are inter-connected underground, and are directly connected to the Beijing Subway. The REIT Manager believes that the four components of China Central Place (office towers, shopping malls, hotels and residential complexes) are complementary to each other and form a community with a range of facilities and services, which facilitate the business activities and daily life activities of the users of the complex. China Central Place is widely recognized as a shopping landmark in Beijing, primarily owing to Shin Kong Place, one of the largest department stores in China by sales. With the 58

66 INVESTMENT HIGHLIGHTS combination of its shopping experience and a wide variety of leisure activities as well as food and beverage options, Shin Kong Place has become one of the most popular shopping and leisure destinations in Beijing. The presence of The Ritz-Carlton Hotel Beijing and JW Marriott Hotel Beijing in China Central Place also complements the business and commercial activities of the users of the complex, in particular the tenants of the Property. The REIT Manager believes that Shin Kong Place and these five-star hotels not only provide facilities and convenience for the business activities of tenants to the Property but also help to promote the leading status of the Property among Premium Grade office developments. The REIT Manager believes the synergies between the different components of China Central Place and its well-known status are key elements contributing to the success of the business of the Property. High occupancy rates and a diverse and high quality tenant base at the Property The Property maintained a high occupancy rate during the Track Record Period. The average Office Occupancy Rate was 90%, 96%, 96% and 96% for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively. The Property has a diverse and high quality tenant base with a total of 125 tenants under 174 leases as of June 30, A significant number of these tenants are leading multi-national and domestic companies, which include Deutsche Bank, Condé Nast, NBA, Tesco, SAP AG, White & Case LLP, Zhong De Securities, Global Law Office, Aecom, Itochu, Brasil Embraer, Baxter, Richemont and Bain & Company. The tenants are also in a wide variety of industry sectors, including finance, insurance, professional services, education, media, sport, energy, technology and health care, and represent a balance of international and domestic organizations. None of the tenants accounted for more than 6.0% of the Property s Total Office GFA for the six months ended June 30, The REIT Manager believes that a diverse and high quality tenant base will help Spring REIT to achieve a stable income stream. Attractive distribution prospects supported by organic growth DTZ expects that the supply of Grade A office space for lease in Beijing s CBD will be limited in the next few years and that there will be no supply of Premium Grade offices in the coming two years. As of the first quarter of 2013, the occupancy rate of Grade A offices in the CBD was 97.3%. Given the limited supply and the current occupancy rate position, DTZ expects that the occupancy rate for Grade A offices in the CBD from 2013 to 2016 will remain high at around 97%. Grade A offices in the CBD also enjoy a higher average rental rate than the citywide average. In the first quarter of 2013, the average rental rate for Grade A offices in the CBD was 11.7% higher than the citywide average. In addition, the average rental rate for Premium Grade office buildings was higher than general Grade A office buildings within the same submarket by a further 36.2% in the first quarter of DTZ expects that rental rates will remain high in the CBD in the next few years as a result of the scarcity of office space in the CBD. Lease expiration presents an opportunity for increasing rental rates. Typically, the term for a lease agreement relating to the Property is approximately three years. Beijing office rental levels have increased significantly since 2011 and a large portion of leases at the Property were entered into before the increase. As of June 30, 2013, leases comprising approximately 28%, 31% and 12% of the Total Office GFA will expire and can potentially be 59

67 INVESTMENT HIGHLIGHTS re-leased or renewed to achieve higher rents in 2013, 2014 and 2015, respectively. The average leased Unit Rent for the six months ended June 30, 2013 was RMB268, which is much lower than the average Unit Rent of RMB376 for leases entered into in the first six months ended June 30, Benefiting from office rental market growth in Beijing and the potential to increase rental rates through lease renewals and new leases, the REIT Manager believes that Spring REIT will experience significant rental income growth in 2013, should current market conditions continue and subject to the other assumptions set out in the section headed Profit Forecast in this Offering Circular. Currently, the REIT Manager expects to pay an annualized distribution yield of 4.94% based on the Maximum Offer Price and 5.23% based on the Minimum Offer Price, in respect of the period from the Listing Date to December 31, See the sections headed Profit Forecast, Statement of Distributions and Risk Factors Risks Relating to an Investment in the Units The forward-looking and certain other information in this Offering Circular may prove inaccurate in this Offering Circular for further details. Transparent and professional management by a highly experienced management team with a proven track record Spring REIT will be managed by the REIT Manager, Spring Asset Management Limited, which is 100% owned by AD Capital, a private equity investment firm owned by DBJ, Asuka Asset Management Co., Ltd. and certain minority management shareholders. AD Capital, based in Japan and led by Mr. Toshihiro Toyoshima, has considerable experience in private equity and real estate investments. AD Capital, as a professional investment manager, has gained considerable experience in management of projects through its active involvement in the day-to-day management and operation of each project it has invested in with support from professional third parties. The REIT Manager believes that the successful investment and management experience of AD Capital will be beneficial to Spring REIT. Furthermore, the Board of Directors and the management team of the REIT Manager have extensive experience in real estate investment and asset management. In particular, Mr. Toshihiro Toyoshima, Chairman of the Board and the CEO of AD Capital, has extensive experience in investment and real estate management. Mr. Toyoshima also led a number of innovative financing schemes while he worked with DBJ, three of which were awarded Deal of the Year by Project Finance Magazine. Mr. Lau Jin Tin, Don, a managing director of the REIT Manager, previously served as a Responsible Officer and Deputy Chief Executive Officer of a REIT listed on the Hong Kong Stock Exchange. He has the appropriate experience in planning the business direction and managing the overall day-to-day operations of a REIT. Mr. Nobumasa Saeki, a managing director of the REIT Manager, has extensive experience in managing properties, especially properties in Japan, and has been actively involved in the management and operation of the Property since The REIT Manager believes that the management team s experience of and insight into the Beijing office rental market will make Spring REIT well positioned to capitalize on market growth and achieve optimal operational results. The management team, together with the Property Manager, has demonstrated its ability to strategically select the right tenant mix in order to promote the Property as a leading office property and as a result attract better tenants and increase rental rates. Spring REIT s management team also has a proven track record of actively managing the Property. The average Office Occupancy Rate of the Property was 90%, 96%, 96% and 96% for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively. Under their management, the 60

68 INVESTMENT HIGHLIGHTS Property has become one of the most highly regarded Premium Grade offices in Beijing and received numerous awards. With a strong emphasis on customer service, the management team, with the support of the Property Manager and the Building Manager, has been able to provide, and expects to continue to provide, professional and high quality services to tenants and thereby retain existing tenants and attract new tenants. Spring REIT s management team will endeavor to deliver stable and sustainable distributions to Unitholders, in part, through their experience and expertise in managing the Property. Spring REIT s management team also intends to focus on transparency and management accountability. The REIT Manager has established several board committees, including an audit committee and a disclosure committee, and adopted international bestpractice corporate governance standards, in order to seek to guarantee the ongoing transparency of management of Spring REIT. 61

69 STRATEGY The key objectives of the REIT Manager for Spring REIT are to provide Unitholders with stable distributions and the potential for sustainable long-term growth in the distributions and enhancement in the value of the real estate assets. The REIT Manager intends to accomplish these objectives through holding and investing in high quality income-producing real estate assets in mainland China, although future acquisitions may also be made in Hong Kong, Macau, Taiwan, Japan and other areas of Asia. The implementation of the REIT Manager s strategy can be broadly categorized as follows: Asset Management Strategy. The REIT Manager intends to actively manage Spring REIT s property portfolio to maximize long-term value, maintain high occupancy rates, increase lease renewal rates and maintain a high quality tenant base. The REIT Manager will work closely with both the Property Manager and the Building Manager to drive organic growth and maintain strong relationships with tenants. Acquisition Strategy. The REIT Manager intends to seek to selectively acquire additional high quality income-producing real estate that meets its investment criteria. Capital and Risk Management Strategy. The REIT Manager intends to focus on maximizing the returns on the portfolio and distributions to Unitholders, while maintaining an appropriate loan-to-value ratio. ASSET MANAGEMENT STRATEGY Maintain high occupancy rates and maximize long-term value of the Property The REIT Manager will seek to maintain high occupancy rates and maximize the longterm value of the Property. To maintain high occupancy rates, the REIT Manager intends to: increase tenant retention rates by maintaining good relationships with existing tenants; work with the Property Manager and Building Manager to provide world-class professional services to meet the tenants ongoing needs; proactively manage lease renewals to minimize downtime arising from lease expirations or early termination; attract new tenants to the Property by actively conducting marketing through property agents and advertising the Property through the media such as newspapers and the Internet to further increase the awareness of the Property to attract new tenants; explore mutually beneficial marketing opportunities with China Central Place; and leverage on the brand recognition of China Central Place and the benefits of being in a prime mixed-use complex to further promote the Property. To maximize the long-term value of the Property, the REIT Manager will seek to optimize rental rates in renewals and new leases by leveraging on the low vacancy and tight supply 62

70 STRATEGY dynamics of the Beijing office market, particularly in the CBD. The REIT Manager also plans to work with the Property Manager to closely monitor rental collection to minimize defaults by tenants. Optimize tenant mix The REIT Manager plans to actively manage lease expirations to identify opportunities to maintain an optimal tenant mix. The REIT Manager intends to continue to verify the backgrounds of new tenants before entering into leases, including the nature of their business and their customers, and focus on maintaining a high quality tenant base to promote the prestigious status of the Property and ensure stability of rental income. Control property expenses The REIT Manager intends to work closely with the Property Manager to control property expenses without compromising the quality of services to tenants. The REIT Manager intends to continue to monitor expenses closely against the annual maintenance and renovation plan. Increase returns through asset enhancement The REIT Manager intends to continue to improve the Property where necessary to increase the value of the Property and thus the value of Spring REIT. The REIT Manager intends to (i) maintain a good relationship with owners or managers of the other property components of China Central Place to create synergies and increase the value of the complex; and (ii) create more lettable space, increase the connectivity and accessibility of the Property, and refurbish the Property where feasible. Improve asset management expertise and provide high quality services The REIT Manager will seek to provide high quality services to the tenants of the Properties. In particular, the REIT Manager intends to: employ external consultants, advisors and service providers as and when it considers appropriate; closely monitor and benchmark staff and service provider performance against international standards, as well as against the standards of local competitors; and create a feedback mechanism for all staff and service providers. ACQUISITION STRATEGY The REIT Manager intends to capitalize on acquisition opportunities that provide the potential for attractive yields and net asset growth, primarily in mainland China, although future acquisitions may also be made in Hong Kong, Macau, Taiwan, Japan and other parts of Asia. In evaluating acquisition opportunities, the REIT Manager will consider the following criteria: consistency with the REIT Manager s strategy to invest in high quality incomeproducing commercial properties primarily in Greater China and potentially other parts of Asia, for instance Japan where Spring REIT has strength; 63

71 STRATEGY ability of the target property to complement the existing portfolio; and opportunities to enhance the target property to increase investment returns and create value. CAPITAL AND RISK MANAGEMENT STRATEGY The REIT Manager will focus on maximizing the returns on the portfolio and distributions to Unitholders, while maintaining an appropriate loan-to-value ratio. The REIT Manager will endeavor to optimize the capital structure of Spring REIT within the requirements of the REIT Code. The ratio of total borrowings of Spring REIT against its total gross asset value is required to be maintained at below 45% under the REIT Code. To satisfy this limit, the REIT Manager will seek to take into account a reasonable margin for adverse fluctuations in asset value in order to create a buffer for future capital expenditure and working capital needs. The REIT Manager may use a combination of debt and equity financing to fund future acquisitions and asset enhancements and will implement a prudent financial and capital management policy. The REIT Manager will, from time to time, review and optimize the fixed rate/floating rate profile of Spring REIT s borrowings and evaluate refinancing options, which may include long-term bank borrowings, bonds and medium-term notes. The REIT Manager aims to minimize the risks and exposures relating to interest rates and foreign exchange rates through the use of appropriate financial instruments. 64

72 THE PROPERTY AND BUSINESS OVERVIEW The Property Note: The Property does not include Levels 1 to 3 of both Office Tower 1 and Office Tower 2, which are part of China Central Mall. Spring REIT will initially invest in and own the Property through its ownership of RCA01. Spring REIT does not own other parts of China Central Place other than the Property. The Property comprises two Premium Grade office buildings strategically located in the CBD of Beijing. By DTZ s definitions, Premium Grade office buildings form a subset of Grade A office buildings with the highest quality standards of any office building. A Premium Grade office building is distinguished from a general Grade A office building by a number of features, including the location, supply of car parking spaces, building quality and standard of finish, provision and service of elevators and single ownership structure. Offices in Premium Grade office buildings generally command higher unit rents than offices in buildings with lower classifications. The Property is one of the most highly regarded Premium Grade office properties in Beijing. By DTZ s definitions, there are a total of 10 Premium Grade office properties in the CBD of Beijing. The Property comprises all of the office floors of Office Tower 1 (including Levels 4 to 28, and the equipment and emergency shelter floor on Level 16, which contains no lettable space) and Office Tower 2 (including Levels 4 to 32, and the equipment and emergency shelter floor on Level 20, which contains no lettable space) in China Central Place and a total of approximately 600 car parking spaces located in the underground levels of the two office 65

73 THE PROPERTY AND BUSINESS buildings. Office Tower 1 has a total of 28 storeys and Office Tower 2 has a total of 32 storeys. Levels 1 to 3 of both Office Tower 1 and Office Tower 2 are part of China Central Mall, which is not owned by RCA01. The equipment and emergency shelter floors on Level 16 of Office Tower 1 and Level 20 of Office Tower 2 are used exclusively for the purpose of storage of equipment that service the office towers and as emergency shelter during natural and other disasters. The Property has a total of 120,245 sq.m. of office space and a total of 25,127 sq.m. of car parking spaces. Construction of the Property commenced in March 2004 and was completed in December Location of China Central Place Beijing Subway Map Note: Subway Line 14 is currently under construction and is expected to be completed in 2015 The Property is located in the southeast corner of Beijing s traditional CBD and the central core area of the expanded CBD. It is bordered on the east by the Fourth Ring Road ( ) and exits directly onto Chang an Avenue ( )/Jianguo Road ( ) in front of the Property. Chang an Avenue ( )/Jianguo Road ( ) is the main east-west artery in Beijing. Along the west, the Property is bordered by West Dawang Road ( ), a six-lane throughway, which runs north-south between mostly residential neighborhoods. 66

74 THE PROPERTY AND BUSINESS The CBD is traditionally a hub for international business and activities and home to the PRC headquarters of many Fortune 500 companies and multi-national corporations. The Property has direct access to Subway Line 1 Dawanglu Station through the shopping mall in the underground, and will also be directly connected to Subway Line 14, construction of which is expected to be completed in The Property s strategic location allows tenants and visitors to avoid the heavy traffic congestion in the China World Trade Center intersection in the center of the traditional CBD and at the same time enjoy convenient accessibility to public transportation facilities. The REIT Manager believes that the design and facilities of the Property are among the highest quality of any office building in Beijing. During the construction of the Property, international architects and engineering consultants were engaged to provide input on the construction quality and design of the Property. The Property features a card access security control system and each of the two buildings is equipped with 12 high-speed passenger lifts to service the office areas and two passenger lifts for changeover to four underground levels. The Property, together with Office Tower 3 at China Central Place, has won numerous awards, including: Top 20 Office Buildings in China jointly by ( ), China Office Building Industry Association ( ) and Nanfeng Think Tank ( ) in 2012; Model Business Service Building in Beijing ( ) by Beijing Municipal Commission of Commerce ( ) in 2012; and National Construction Decoration Design Award ( ) by China Building Decoration Association ( ) in The REIT Manager believes that one of the key factors behind the success of the Property is the ability to achieve rental income growth by striking a balance between maintaining long-term relationships with anchor and loyal tenants and constantly optimizing the tenant mix. The REIT Manager believes that the Property has been able to attract an improved mix of tenants in terms of their industry and profile due to the Property s premium status and high occupancy rate. The Property has a diverse and high quality tenant base with a total of 125 tenants under 174 leases as of June 30, A significant number of these tenants are leading multi-national and domestic companies, which include Deutsche Bank, Condé Nast, NBA, Tesco, SAP AG, White & Case LLP, Zhong De Securities, Global Law Office, Aecom, Itochu, Brasil Embraer, Baxter, Richemont and Bain & Company. The 10 largest tenants (in terms of Monthly Rental Revenue) contributed approximately 34% of total Monthly Rental Revenue for the month ended June 30, The 10 largest tenants in terms of Office GFA accounted for approximately 32% of the Total Office GFA as of June 30, The Property maintained a very high occupancy rate during the Track Record Period. The average Office Occupancy Rates were 90%, 96%, 96% and 96% for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively. DTZ expects that the supply of Grade A office space for lease in the CBD will be limited in the next few years and that there will be no supply of Premium Grade offices in the coming two years. Given the limited supply and the current occupancy rate position, DTZ expects that occupancy rate for Grade A offices in the CBD submarket from 2013 to 2016 will remain high at around 97%. 67

75 THE PROPERTY AND BUSINESS RCA01 acquired the Property from Beijing Guohua, the developer of China Central Place, in RCA01 holds the Property directly. Since the commencement of operations of the Property in 2007, the Property Manager has been appointed to conduct the day-today operation and management of the Property under the Property Management Agreement with supervision from AD Capital s team in Beijing. The Building Manager provides building management services for the Property, including security, cleaning and maintenance services. Spring REIT, as the ultimate owner of all of the office floors of Office Tower 1 and Office Tower 2, through RCA01, has the exclusive right to appoint a building manager to manage all building management matters for the office floors of Office Tower 1 and Office Tower 2. The use and control of the Property is not subject to constraints imposed by the developer of China Central Place, Beijing Guohua, or the owners of the other parts of China Central Place, who, to the best knowledge of the REIT Manager, and after due and careful enquiry, are Independent Third Parties. Therefore, Spring REIT will have full autonomy and influence over matters relating to the property management of the office floors for the Property. Spring REIT also possesses rights of access to all areas of these office floors and to all common areas and service areas required for the management of these office floors. While Spring REIT has the sole discretion to use and control the Property, free from any encumbrances, Spring REIT is restricted by the covenants and security under the Term Loan Facility Agreement and related security agreements, which the REIT Manager believes to be customary for real estate financings, covenants in loan agreements and security agreements. For more details of the covenants that RCA01 is subject to under the Term Loan Facility Agreement, please see the section headed Management s Discussion and Analysis of Financial Condition and Results of Operations Indebtedness in this Offering Circular. China Central Place 68

76 THE PROPERTY AND BUSINESS Spring REIT does not own other parts of China Central Place other than the Property. However, the REIT Manager considers that one of the most important features of the Property is that it forms part of China Central Place, a prime mixed-use development complex in Beijing. China Central Place comprises (i) three Premium Grade office buildings; (ii) Shin Kong Place, one of the largest department stores in China by sales, and other shopping areas in China Central Mall, China Central Square and China Central Commercial Street, (iii) two five-star luxury hotels, The Ritz-Carlton Hotel Beijing and JW Marriott Hotel Beijing, and (iv) residential and serviced apartment buildings and a clubhouse. The office buildings and shopping malls in the complex are inter-connected in the underground, and are directly connected to the Beijing Subway, allowing users to reach buildings in the complex and the Beijing Subway without exiting the complex. The REIT Manager believes that the Property benefits from the synergies between the different components of the complex. The four components of China Central Place (office towers, shopping malls, hotels and residential complexes) complement each other and create a community with comprehensive facilities and services, which significantly enhances the business activities and daily life of the Property s office tenants. The prime status of China Central Place also reinforces the positioning of the Property as a leading Premium Grade office development in Beijing s CBD and helps to promote the business of the Property. The REIT Manager believes the synergies between the different components of China Central Place and its prestige status are that key contributing elements in the success of the Property. 69

77 THE PROPERTY AND BUSINESS China Central Place is widely recognized as a shopping landmark in Beijing, primarily owing to Shin Kong Place, one of the largest department stores in China by sales. It houses numerous leading international and local fashion, beauty and lifestyle brands. It has a large upscale food court in the underground level as well as several other high-end restaurants in other floors, providing a wide variety of high quality eating options. Exhibitions and other cultural activities are regularly held in the event hall in Shin Kong Place drawing footfalls and promoting the shopping experience. With the combination of a world-class shopping experience and a wide variety of leisure activities as well as food and beverage options, Shin Kong Place has become one of the most popular shopping and leisure destinations in Beijing. Apart from Shin Kong Place, China Central Place also has other retail sections, including the China Central Mall, China Central Square and China Central Commercial Street. The Ritz-Carlton Hotel Beijing and JW Marriott Hotel Beijing, both five-star luxury hotels, have a total of approximately 900 guest rooms and 20 function rooms and conference rooms. The two hotels complement the business and commercial activities of users of the complex, in particular the tenants of the Property. China Central Place has received numerous awards, including Asia Pacific Real Estate Award Urban Design of the Year by Asiacre.com in 2006 and China Intensive Urbanization Model Case ( ) by China International Urbanization Development Strategy Research Committee ( ) in THE PROPERTY Tenant Profile As of June 30, 2013, the Property was leased to 125 tenants under 174 leases. The Property has a diverse tenant base. The chart below provides a breakdown of the mix of the office tenants of the Property by industry sector as a percentage of Leased Office GFA as of June 30, Tenant Mix by Industry (as a percentage of Leased Office GFA) Technology, 10% Business Center and Others, 4% Education / Media / Sports, 9% Real Estate / Retail / Consumer Products, 16% Energy / Resources / Shipping / Trading, 7% Professional & Business Service, 17% Financial Institution / Insurance / Investment, 26% Pharmaceutical / Health Care, 3% Machinery / Equipment / Manufacturing, 8% 70

78 THE PROPERTY AND BUSINESS The chart below provides a breakdown of the mix of office tenants of the Property by industry sector as a percentage of Monthly Rental Revenue for the month ended June 30, Tenant Mix by Industry (as a percentage of Monthly Rental Revenue) Real Estate / Retail / Consumer Products, 20% Technology, 10% Business Center and Others, 4% Education / Media / Sports, 8% Energy / Resources / Shipping / Trading, 6% Professional & Business Service, 16% Financial Institution / Insurance / Investment, 26% Pharmaceutical / Health Care, 3% Machinery / Equipment / Manufacturing, 7% The five largest tenants of the Property in terms of Office GFA accounted for 21.5% of the Total Office GFA as of June 30, The following table sets forth information on the five largest tenants of the Property in terms of Office GFA as of June 30, 2013: Tenant Expiration date(s) Office GFA Percentage of Total Office GFA (sq.m.) (%) Deutsche Bank and its affiliated companies... November 2013 (1) 7, SAPAG... March , Condé Nast... January , Zhong De Securities... April , Global Law Office... June , Total... 25, Note: (1) The lease with Deutsche Bank and its affiliated companies expires on November 30, As of the Latest Practicable Date, the Property Manager is in the process of renewing this lease. Other than Deutsche Bank and Zhong De Securities, which are connected persons of Spring REIT as a result of their relationships with the Trustee, none of the other three largest tenants in terms of Office GFA are connected persons of Spring REIT. Connected persons of Spring REIT occupied approximately 9.2% (0.6% by the REIT Manager Connected Persons Group and 8.6% by the Trustee Connected Persons) of the Property s Total Office GFA and contributed 9.3% (0.6% by the REIT Manager Connected Persons Group and 8.8% by the Trustee Connected Persons) of total Monthly Rental Revenue for the month ended June 30, Each of these leases has been transacted on normal arm s length commercial terms. 71

79 THE PROPERTY AND BUSINESS Occupancy and Unit Rent The following table sets forth information on the average Office Occupancy Rate, average Unit Rent of new/renewed leases and average leased Unit Rent for the periods indicated: Average Office Occupancy Rate (1) Average Unit Rent of New/Renewed Leases (2) Average Leased Unit Rent (3) (%) (RMB) (RMB) Year ended December 31, Year ended December 31, Year ended December 31, Six months ended June 30, Notes: (1) The average Office Occupancy Rate over the relevant period is derived by dividing the sum of the occupancy rates as of the end of each month during the relevant period by the number of months in the relevant period. (2) The average Unit Rent of new/renewed leases over the relevant period is calculated as the weighted average of the Unit Rent for lease agreements, the performance of which commences during a relevant period. (3) The average leased Unit Rent is calculated as the weighted average of the Unit Rent for lease agreements that are being performed during a relevant period. Expiration and Renewals Lease terms for the lease agreements relating to the Property are generally approximately three years, which is in line with the general practice in the Beijing property market for office leases. Tenants generally have an option to renew their leases for an additional term by providing at least six months prior written notice that they wish to exercise the option to the Property Manager before the expiration of the current leases and entering into a new lease three months before the expiration of the current lease. Tenants are generally deemed to have given up the option to renew if they fail to provide notice or enter into new leases with the Property Manager within the required time. Rent for the additional term is determined through negotiation between the tenant and the Property Manager (on behalf of RCA01), and in accordance with the then prevailing market standard. The lease agreements do not generally give tenants the right to terminate their leases prior to their scheduled expiration dates, except in limited situations such as when there are major defects in the leased premises either on handover to the tenant or that arise during the course of the lease term and are not corrected within a reasonable time. 72

80 THE PROPERTY AND BUSINESS The following table sets forth details of expirations in respect of leases as of June 30, 2013 which are scheduled to take place during the periods indicated: Period Office GFA of Leases Expiring Expiring Leases as a percentage of Leased Office GFA Average Unit Rent for Leases Expiring (1) (sq.m.) (%) (RMB/sq.m.) 2013 (July 1 to December 31)... 31, , , , , Note: (1) The average Unit Rent for leases expiring over the relevant period is calculated as the weighted average of the Unit Rent for lease agreements which are expiring during a relevant period. Valuation The Appraised Value of the Property as determined by the Independent Property Valuer as of August 31, 2013 was RMB7,747 million. Information regarding the Title of the Property RCA01 holds the Property under a land use rights certificate as well as building ownership certificates with land use rights for a term of 50 years expiring on October 28, In addition, the PRC Legal Advisor has confirmed that the land use rights and building ownership rights of the Property have been mortgaged to the security agent under the Term Loan Facility. For details on the Term Loan Facility, see the section headed Financial Information and Forecasts Management s Discussion and Analysis of Financial Condition and Results of Operations Indebtedness in this Offering Circular. Registration of the mortgage on the building ownership rights of the Property was completed on July 15, 2013, and the registration of the mortgage on the land use rights of the Property was completed on July 25, Except for the abovementioned mortgages, there are no other mortgage registrations and seizure records relating to the land use rights and building ownership rights of the Property. Marketing and Leasing Activities The Property Manager has a dedicated marketing team, which seeks to identify suitable tenants. The REIT Manager and the Property Manager will actively conduct marketing through property agents and advertise the Property through the media such as newspapers and the internet to further increase the awareness of the Property, and explore mutually beneficial marketing opportunities with China Central Place. Leasing agents are regularly updated with information relating to available space. 73

81 THE PROPERTY AND BUSINESS Lease Management and Lease Agreements Lease Management The Property Manager is appointed as an agent of RCA01 to conduct the day-to-day operation and management of the Property under the Property Management Agreement. The Property Manager receives a monthly service fee, which equals to 2.0% of the total monthly revenue of the Property, for providing the services as described below. (i) Lease management services. The Property Manager is authorized to identify tenants and enter into lease agreements in the capacity as an agent of RCA01. The Property Manager is required to seek the prior approval from RCA01 before entering into any lease agreements which modify any provision of the standard lease agreements. The Property Manager submits a report to RCA01 monthly or upon request, summarizing the rental income, new lease agreements entered into, leases terminated and other important items each month. In the lease agreements, it is clearly indicated that the Property Manager is entering into the agreement as an agent of the owner of the Property, RCA01, and that it has obtained a power of attorney from RCA01 to do so. The PRC Legal Advisor has confirmed that the relationship between RCA01 and the Property Manager is that of principal and agent under the PRC laws, and that RCA01, as the principal of the Property Manager, has the right to directly enforce the lease agreements and hold the tenants liable for any breach of the lease agreements. (ii) Building management services. The Property Manager is authorized to select a competent building manager to provide building management services and supervise the work provided by the building manager. Beijing CCP & Savills Property Services Management Co., Ltd. has been appointed as the building manager for the Property. The Building Manager receives building management fees from tenants directly for its services. In addition, the Building Manager manages leasing for the car parking spaces on behalf of RCA01. (iii) Cash management services. The Property Manager is authorized to collect rents from tenants and transfer the proceeds to an account designated by RCA01, manage the account books and records, arrange payments for costs and expenses concerning the operation of the Property out of the operating account and transfer the funds to the designated offshore account, which shall be under the supervision of the REIT Manager. The Property Manager provides the cash flow statements of the Property and reports the actual revenues and expenditures of the Property to RCA01 at the end of each month. Tenants are required to deposit all payments under their lease agreements into the account designated by RCA01. The Property Manager is contractually prohibited under the account control agreement entered into in relation to the Term Loan Facility from unilaterally withdrawing funds from the account without the approval of the facility agent under the Term Loan Facility even though the account is under its name and the Property Manager acknowledges that it has no right, title or interest in or to the funds in such account. The PRC Legal Advisor has confirmed that RCA01, as the principal of the Property Manager, has full legal rights over the funds in the account managed by the Property Manager, and even in the bankruptcy proceedings of the Property Manager, creditors of the Property Manager have no claims against funds in bank account managed by the Property Manager on behalf of RCA01. The Trustee will have appropriate control and oversight of the funds in the bank accounts of RCA01 maintained in the PRC. 74

82 THE PROPERTY AND BUSINESS Lease Agreements After entering into a lease, tenants of the Property are required to provide a security deposit which amounts to the sum of approximately three months rent and three months building management fee. Security deposits are unsecured and do not bear interest. Tenants are generally required to pay their monthly rent in advance. Consistent with market practice, rent-free periods, typically one to three months for a lease term of three years, are commonly granted on leases. Under the leases, tenants are normally responsible for payment of outgoings including utilities and the fees of the Building Manager. Tenants are generally also responsible for repairing, and the payment of all other expenses relating to, the interior decoration of the premises, while the Property Manager on behalf of RCA01 is generally responsible for repairing the public facilities and main structure. In the event that the premises are rendered unfit for use by force majeure and RCA01 and the relevant tenant fail to reach agreement as to performance of the current lease for a prescribed period of time, either the tenant or the Property Manager on behalf of RCA01 may terminate the lease. Tenants are not permitted to assign or sublet the premises without the written consent of the Property Manager on behalf of RCA01. The lease agreements do not generally give tenants the right to terminate their leases prior to their scheduled expiration dates, except in limited situations such as when there are major defects in the lease premises either on handover to the tenant or that arise during the course of the lease term and are not corrected within a reasonable time. The Property Manager, on behalf of RCA01, has the right to terminate leases upon the occurrence of certain events, such as non-payment of rent or breach of covenants by the tenants. The tenants are required to use the leased premises for the permitted purposes only and otherwise in accordance with all applicable laws and regulations in the PRC. Renovation and Improvement The REIT Manager works with the Property Manager to identify the renovation and improvement work necessary to be carried out in each forthcoming year and prepare an annual budget for such renovation and improvement work at the end of every year. As of the Latest Practicable Date, no major maintenance and improvement work had been scheduled. Five-Year Transaction History There were no transactions involving a sale or purchase of the Property in the five years immediately preceding the Latest Practicable Date. Competition The office property market in Beijing is highly competitive. Principal competitive factors include rental rates, prestige and location of properties, quality of the building, availability of nearby amenities and supply of comparable office space. The Property competes primarily with other Grade A office buildings in Beijing s CBD, including office space in China World Trade Centre Towers Two and Three, Yintai Centre and Kerry Centre. There may be potential competition between the Property and Office Tower 3 in Central China Place, although the REIT Manager believes that having Office Tower 3 in an integrated complex with the Property allows the Property to benefit from certain synergies. 75

83 THE PROPERTY AND BUSINESS Insurance Spring REIT has comprehensive insurance for the Property to meet the requirements under the Term Loan Facility, which the REIT Manager believes to be superior to the industry practice in Beijing. This includes property all risk insurance, business interruption insurance and public liability insurance. There are no significant or unusual excess or deductible amounts required under such policies. There are, however, certain types of risks that are not covered by such insurance policies, including losses resulting from nuclear contamination and infectious or contagious diseases. Litigation To the REIT Manager s knowledge, none of Spring REIT, the REIT Manager, the Directors, the Property Manager, the Building Manager or RCA Fund is currently involved in any material litigation, arbitration or legal proceeding, nor is there any material litigation, arbitration or legal proceeding currently threatened against any of them. As of the Latest Practicable Date, there had not been any material delinquency in the collection of the rental in respect of the Property and there was no pending action relating to claims of unpaid rental. Legal and Regulatory Compliance The REIT Manager has been advised by the PRC Legal Advisor that RCA01 has obtained all relevant approvals, permits, licenses and certificates for its holding of the land use rights and the building ownership rights over the Property and for it to conduct its current business and that RCA01 has complied with the relevant PRC laws and regulations in all material respects. The PRC Legal Advisor has also confirmed that there has not been any material violation of laws applicable to the development, holding and operation of the Property by RCA01 other than the filing of 18 lease agreements that have not yet been completed as required by the PRC laws. However, the PRC Legal Advisor has confirmed that there is no adverse impact related to the non-completion of the filing of these 18 lease agreements. See Appendix VI to this Offering Circular for the applicable laws and regulations to which Spring REIT will be subject. Environmental Matters Spring REIT s operations are subject to various environmental laws. The Property has operated, and going forward the REIT Manager will continue to manage the Property, in compliance with applicable environmental laws and regulations. Neither the REIT Manager nor RCA01 has ever received any fines or penalties associated with the breach of any environmental laws and regulations in relation to the Property. 76

84 FINANCIAL INFORMATION AND FORECASTS 77

85 SELECTED FINANCIAL INFORMATION The following tables set forth selected financial information on a historical basis for RCA01. The selected historical income statements, statements of comprehensive income and cash flows for each of the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and 2013 and the statements of financial position as of December 31, 2010, 2011 and 2012 and June 30, 2013 have been derived from RCA01 s financial information and related notes thereto, which have been included in Appendix I to this Offering Circular. The financial information as of and for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013 and the related notes thereto have been prepared in accordance with IFRS and have been audited by PricewaterhouseCoopers, the reporting accountant. The income statement, statements of comprehensive income and cash flows for the six months ended June 30, 2012 have been derived from RCA01 s unaudited financial information and related notes thereto, which have been included in Appendix I to this Offering Circular. The selected historical financial information for RCA01 included below and set forth in Appendix I to this Offering Circular is not indicative of Spring REIT s future performance. You should read the following selected financial information together with the sections headed The Property and Business, Management s Discussion and Analysis of Financial Condition and Results of Operations and Unaudited Pro Forma Statement of Financial Position in this Offering Circular and the historical financial information of RCA01 and related notes thereto set forth in Appendix I to this Offering Circular. For a discussion of Spring REIT s future financial condition and results of operations, see the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations in this Offering Circular. Statements of Comprehensive Income Year ended December 31, Six months ended June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (unaudited) Revenues... 37,191 44,692 52,903 24,829 30,510 Operating expenses... (11,691) (12,425) (13,630) (6,468) (7,755) General and Administrative expenses... (272) (303) (226) (67) (2,037) Increase in fair value of an investment property , , , ,356 45,912 Other losses, net... (13,777) (1,025) (7,520) (3,749) (5,158) Operating profit , , , ,901 61,472 Finance income Finance costs (1)... (34,498) (5,977) (27,575) (15,846) (9,394) Profit for the year/period... 99, , , ,223 52,266 Other comprehensive income/(loss) Exchange gain/(loss) on translation of financial statements... 5,527 15,481 1,838 (1,864) 10,778 Total comprehensive income for the year/period , , , ,359 63,044 Note: (1) Please see Note 9 to the Accountant s Report set out in Appendix I to this Offering Circular for more information on finance costs. 78

86 SELECTED FINANCIAL INFORMATION Statements of Financial Position As of December 31, As of June 30, US$ 000 US$ 000 US$ 000 US$ 000 ASSETS Non-current assets Investment property , ,509 1,186,859 1,253,500 Derivative financial instruments... 6,443 4,613 2, , ,122 1,186,859 1,255,543 Current assets Trade and other receivables... 3,113 1,309 1,817 2,693 Amount due from redeemable preference shareholders (1).. 11,983 25,466 29,080 Restricted bank balances... 30,256 34,782 36,955 55,916 Cash and cash equivalents... 5,927 2,099 12,076 20,675 51,279 63,656 79,928 79,284 Total assets ,336 1,061,778 1,266,787 1,334,827 EQUITY Capital and reserves Ordinary shares... Redeemable preference shares (2) , , , ,934 Retained earnings , , , ,697 Exchange reserves... 5,527 21,008 22,846 33,624 Total equity , , , ,255 LIABILITIES Non-current liabilities Long-term borrowings , , ,535 Current liabilities Rental deposits... 12,446 14,622 16,652 19,314 Receipts in advance, accruals and other payables... 7,333 5,371 6,914 11,723 Current portion of long-term borrowings ,174 19,779 19, ,740 31,037 Total liabilities , , , ,572 Total equity and liabilities ,336 1,061,778 1,266,787 1,334,827 Net current assets / (liabilities)... 31,500 43,663 (420,812) 48,247 Total assets less current liabilities ,557 1,041, ,047 1,303,790 Statements of Cash Flows Six months ended Year ended December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (unaudited) Net cash generated from operating activities... 31,463 34,575 39,509 18,947 27,063 Net cash used in investing activities... (3,862) (12,552) (3,535) (2,834) (3,234) Net cash used in financing activities... (21,675) (25,851) (25,998) (11,095) (15,232) Net increase/(decrease) in cash and cash equivalents... 5,926 (3,828) 9,976 5,018 8,597 Cash and cash equivalents at beginning of the year/ period ,927 2,099 2,099 12,076 Exchange gains on cash and cash equivalents Cash and cash equivalents at end of the year/period... 5,927 2,099 12,076 7,117 20,675 Notes: (1) This receivable represents the asset management fee paid by RCA01 on behalf of RCA Fund to AD Capital. The receivable was offset by a dividend payable on June 28, (2) The preference shares in RCA01 will be reclassified as ordinary shares prior to Completion. 79

87 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the section headed Selected Financial Information in this Offering Circular and the historical financial information of RCA01 and related notes thereto set forth in Appendix I to this Offering Circular. The financial information for RCA01 included below is not indicative of Spring REIT s future performance. For a discussion of Spring REIT s future financial condition and operations, see the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations in this Offering Circular. Statements contained in this section that are not historical facts may be forwardlooking statements based on certain assumptions, expectations and beliefs of the REIT Manager. You are cautioned that there are certain risks and uncertainties associated with Spring REIT and the actual results may differ materially from those projected by such forward-looking statements. BASIS OF DISCUSSION AND PRESENTATION Spring REIT, which will only acquire RCA01 on the second Business Day immediately preceding the Listing Date, has no operating history. The REIT Manager has therefore set forth below a discussion of the historical operating results of RCA01 as of and for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and The historical financial information set out in the section headed Selected Financial Information and the Accountant s Report on RCA01 set out in Appendix I to this Offering Circular reflect the operating results of RCA01. Upon Completion, Spring REIT will hold the ownership interest in the Property indirectly through RCA01. The Property is discussed in greater detail in the section headed The Property and Business in this Offering Circular. After the Listing Date, there will be certain changes to Spring REIT s cost structure, level of indebtedness and operations. The cost structure of Spring REIT after the Listing Date will differ in certain significant respects from the historical cost structure of RCA01. For example, certain costs, such as the REIT Manager s and Trustee s fees and other trust-related expenses, that were not costs of RCA01 historically will become costs of Spring REIT going forward. Further, the presentation format of Spring REIT s financial information may differ from that of the audited financial information set forth in Appendix I to this Offering Circular. For more information, see the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations in this Offering Circular. PRINCIPAL ACCOUNTING POLICIES For a discussion of the principal accounting policies used in the preparation of the audited financial statements, see Note 2 of the Accountant s Report set out in Appendix I to this Offering Circular. FACTORS AFFECTING RESULTS OF OPERATIONS The key factors affecting Spring REIT s financial condition and results of operations include the following: Rental and Occupancy Rates Spring REIT s rental income depends principally on the rental rates the Property is able to command and the occupancy rates it is able to maintain. Factors affecting the rental rates 80

88 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and occupancy rates include the competitiveness of competing properties, tenant retention rates on expiration of the leases, market conditions and general macroeconomic and supply/ demand trends affecting the office property market in Beijing. In addition to general macroeconomic and supply/demand trends affecting the office property market in Beijing, occupancy rates depend on rental rates relative to other competing properties and the ability to minimize downtime arising from lease expirations or early terminations. The following table sets forth information on the average Office Occupancy Rate, average Unit Rent of new/renewed leases and the average leased Unit Rent for the periods indicated: Average Office Occupancy Rate (1) Average Unit Rent of New/Renewed Leases (2) Average Leased Unit Rent (3) % (RMB) (RMB) Year ended December 31, Year ended December 31, Year ended December 31, Six months ended June 30, Notes: (1) The average Office Occupancy Rate over the relevant period is derived by dividing the sum of the occupancy rates as of the end of each month during the relevant period by the number of months in the relevant period. (2) The average Unit Rent of new/renewed leases over the relevant period is calculated as the weighted average of the Unit Rent for lease agreements, the performance of which commences during a relevant period. (3) The average leased Unit Rent is calculated as the weighted average of the Unit Rent for lease agreements that are being performed during a relevant period. Expiration and Renewal of Existing Leases The lease agreements entered into for the Property are generally for a term of three years. Tenants usually do not have the right to terminate their leases prior to the scheduled expiration dates, except in limited situations such as when there are major defects in the leased premises. As of June 30, 2013, leases representing 28%, 31% and 12% of the Leased Office GFA of the Property were scheduled to expire in the six months ending December 31, 2013 and the years ending December 31, 2014 and 2015, respectively. For additional information on leases which are scheduled to expire in the following few years, see the section headed The Property and Business Expiration and Renewals in this Offering Circular. Spring REIT s ability to re-lease expiring space will impact its results of operations. Changes in Fair Value of Investment Property as a Result of Economic and Market Conditions The revaluation of the Property in the past has had an impact on the results of operations of the Property, and may in the future result in significant fluctuations in the results of operations of Spring REIT. The Property is accounted for as investment property, and RCA01 is required to recognize income or loss in its income statement if the value of the Property changes in the revaluation. During the Track Record Period, RCA01 recorded gain from the increase in fair value of investment property of US$122.1 million, US$158.5 million, US$190.1 million, US$113.4 million and US$45.9 million for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and 2013, respectively. The Property was valued as of December 31, 2010, 2011 and 2012 and June 30, 2012 and

89 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS by the Independent Property Valuer. For additional information on the increase in fair value of investment property, see Note 11 to the Accountant s Report set out in Appendix I to this Offering Circular. The fair value of the Property represents open market value, which is affected to a large extent by property market conditions. The fair value of the Property is valued by the Independent Property Valuer based on methods and assumptions that were periodically adjusted by the Independent Property Valuer to reflect market conditions. The PRC property market is volatile and has in the past experienced and may in the future experience oversupply and property price fluctuations. The central and local governments adjust monetary and other economic policies from time to time to prevent and curtail the overheating of the PRC and local economies, and such economic adjustments may affect the property market in Beijing and other parts of the PRC. For additional information on the policies adopted by the PRC Government, see the section headed Risk Factors Risks Relating to the PRC The PRC Government has implemented property control measures in relation to the PRC property market in this Offering Circular. Bank Borrowings RCA01 has maintained and is expected to maintain significant indebtedness under loan facilities with banks. RCA01 recognizes finance costs in connection with these bank borrowings and enters into derivative financial instruments as part of its financial risk management. COMPONENTS OF RESULTS OF OPERATIONS Revenues During the Track Record Period, RCA01 generated revenues from (i) rental income; (ii) car park income; and (iii) other income from the Property. Rental income represents primarily the amounts recognized from tenants under their leases and signage revenues, but does not include building management fees as building management fees are paid directly to the Building Manager by tenants. Other income represents compensation paid by tenants for early termination of leases, which comprises primarily the deposit of three-month rents paid by the tenants when entering into lease agreements. The following table sets forth a breakdown of the revenues for the periods indicated: US$ 000 Year ended December 31, Six months ended June 30, % of total US$ 000 % of total US$ 000 % of total US$ 000 % of total US$ 000 % of total (unaudited) Rental income... 36, , , , , Car park income Other income , Total... 37, , , , , RCA01 maintained consistently high occupancy rates during the Track Record Period. The average Office Occupancy Rates for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013 were 90%, 96%, 96% and 96%, respectively. 82

90 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses Operating expenses mainly include (i) property management fee, (ii) property taxes, (iii) business tax and other taxes and (iv) withholding tax. For more information on taxes to which RCA01 is subject, see section headed Taxation in this Offering Circular. RCA01 s operating expenses do not include building management fees as they are paid directly to the Building Manager by tenants. The following table sets forth a breakdown of RCA01 s operating expenses for the periods indicated: Year ended December 31, Six months ended June 30, US$ 000 % of total US$ 000 % of total US$ 000 % of total US$ 000 % of total US$ 000 % of total (unaudited) Property management fee... (1,308) 11.2 (1,382) 11.1 (1,063) 7.8 (503) 7.8 (622) 8.0 Property taxes... (3,562) 30.5 (3,732) 30.0 (3,835) 28.1 (1,912) 29.6 (1,944) 25.1 Business tax and other taxes... (1,987) 17.0 (2,630) 21.2 (3,028) 22.3 (1,420) 21.9 (1,815) 23.4 Withholding tax... (3,927) 33.6 (4,727) 38.0 (5,341) 39.2 (2,503) 38.7 (3,158) 40.7 Leasing commission... (297) 2.5 (171) 1.4 (196) 1.4 (60) 0.9 (141) 1.8 Insurance... (146) 1.2 (158) 1.3 (141) 1.0 (70) 1.1 (70) 0.9 Others... (464) (3.0) (26) 0.2 (5) 0.1 Total... (11,691) (12,425) (13,630) (6,468) (7,755) General and Administrative Expenses General and administrative expenses include asset management fee and professional fee. Asset management fee represents the fee payable to AD Capital for the provision of asset management services. In January 2013, a management agreement was entered into between AD Capital and RCA01, whereby RCA01 agreed to pay an asset management fee to AD Capital until the Listing Date. Before January 2013, the asset management fee was borne by RCA Fund. Upon the Listing of the Units, the asset management services will be provided by the REIT Manager, which will receive REIT Manager s fees. The following table sets forth a breakdown of RCA01 s general and administrative expenses for the periods indicated: Six months ended Year ended December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (unaudited) Asset management fee... (1,824) Professional fee... (272) (303) (226) (67) (213) Total... (272) (303) (226) (67) (2,037) Change in Fair Value of the Property The Property is accounted for as investment property. The Property was valued as of December 31, 2010, 2011 and 2012, June 30, 2013 and August 31, 2013 by the Independent Property Valuer. 83

91 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The fair value of the Property as of December 31, 2010, 2011 and 2012 and as of June 30, 2013 was US$790.6 million, US$993.5 million, US$1,186.9 million and US$1,253.5 million, respectively. This resulted in increases of US$122.1 million, US$158.5 million, US$190.1 million and US$45.9 million for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2013, respectively, which were recognized as increases in the fair value of investment property in the audited statements of comprehensive income of RCA01. The fair value of the Property as of August 31, 2013 was US$1,255.4 million. Other Losses, net Other losses, net include net fair value losses of derivative financial instruments, foreign exchange gains or losses, payables written off and other miscellaneous gains or losses. Finance Income Finance income represents interest income generated from bank deposits. Finance Costs Finance costs represent the interest expenses on bank borrowings, foreign exchange losses or gains on bank borrowings and other incidental borrowing costs. Interest expenses on bank borrowings includes contractual loan interest and amortized loan arrangement fees, which were recognized using the effective interest rate method. Foreign exchange losses and gains on bank borrowing arise when translating the bank borrowings denominated in foreign currencies to RMB, the functional currency of RCA01. Other incidental borrowing costs include bank charges and the de-recognition of unamortized loan arrangement fees. A breakdown of our finance costs is set out below. Six months ended Year ended December 31, June 30, US$ 000 US$ 000 US$ 000 US$ 000 US$ 000 (Unaudited) Interest expenses on bank borrowings... (30,588) (29,663) (29,010) (14,020) (14,153) Foreign exchange (losses)/gains on bank borrowings... (3,910) 23,745 1,495 (1,766) 8,558 Other incidental borrowing costs... (59) (60) (60) (3,799) (34,498) (5,977) (27,575) (15,846) (9,394) RESULTS OF OPERATIONS The REIT Manager sets out below a discussion of the historical operating results of RCA01 for the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, 2012 and June 30,

92 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six months ended June 30, 2013 compared against six months ended June 30, 2012 Revenues Total revenues increased by US$5.7 million, or 22.9%, from US$24.8 million for the six months ended June 30, 2012 to US$30.5 million for the six months ended June 30, Rental income Rental income increased by US$6.0 million, or 24.6%, from US$24.3 million for the six months ended June 30, 2012 to US$30.2 million for the six months ended June 30, The increase was primarily due to positive rental reversion as a result of the continued positive market conditions in Beijing. Car park income Car park income remained stable at US$0.2 million for the six months ended June 30, 2012 and Other income Other income decreased from US$0.3 million for the six months ended June 30, 2012 to US$0.1 million for the six months ended June 30, The decrease in other income derived from early termination of leases was primarily due to a decrease in the number of tenants who moved out of the Property before expiry as compared to the six months ended June 30, Operating Expenses Operating expenses increased by US$1.3 million, or 19.9%, from US$6.5 million for the six months ended June 30, 2012 to US$7.8 million for the six months ended June 30, 2013 primarily due to increases in withholding tax and business tax and other taxes corresponding to the increase in rental income. General and Administrative Expenses General and administrative expenses increased by US$2.0 million from US$67,000 for the six months ended June 30, 2012 to US$2.0 million for the six months ended June 30, 2013 primarily due to the incurrence of an asset management fee in the six months ended June 30, Change in Fair Value of the Property The increase in fair value of the Property was US$45.9 million for the six months ended June 30, 2013 compared to an increase of US$113.4 million for the six months ended June 30, The increase in the fair value of investment property for the six months ended June 30, 2013 was the result of higher property values in Beijing, which reflected strong property market conditions, but the increase was significantly less than the change in fair value for the six months ended June 30,

93 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Losses, net Other losses, net increased by US$1.5 million, or 37.6%, from US$3.7 million for the six months ended June 30, 2012 to US$5.2 million for the six months ended June 30, The increase was primarily attributable to an increase in exchange loss of the amount due from redeemable preference shareholders due to appreciation of RMB against Japanese yen during the period. Finance Income Finance income remained stable at US$0.2 million for the six months ended June 30, 2012 and Finance Costs Finance costs decreased by US$6.5 million, or 40.7%, from US$15.8 million for the six months ended June 30, 2012 to US$9.4 million for the six months ended June 30, The decrease was primarily due to (i) the recognition of foreign exchange gains on bank borrowings in the six months ended June 30, 2013, attributable to the appreciation of the RMB against the U.S. dollar during the period, as compared to foreign exchange losses on bank borrowings in the six months ended June 30, 2012, attributable to the depreciation of the RMB against the U.S. dollar during the period; and (ii) an increase in other incidental borrowing costs due to the de-recognition of an unamortized loan arrangement fee arising from the early repayment of bank borrowings in January Profit Profit decreased by US$60.0 million, or 53.4%, from US$112.2 million for the six months ended June 30, 2012 to US$52.3 million for the six months ended June 30, 2013 mainly as a result of the smaller increase in the fair value of the Property in the six months ended June 30, 2013 relative to the six months ended June 30, 2012 as well as the cumulative effect of the other factors described above. Financial Year ended December 31, 2012 compared against Financial Year ended December 31, 2011 Revenues Total revenues increased by US$8.2 million, or 18.4%, from US$44.7 million for the year ended December 31, 2011 to US$52.9 million for the year ended December 31, Rental income Rental income increased by US$7.6 million, or 17.5%, from US$43.7 million for the year ended December 31, 2011 to US$51.3 million for the year ended December 31, The increase was primarily due to positive rental reversion as a result of strong positive market conditions in Beijing. Car park income Car park income increased by US$0.1 million, or 20.3%, from US$0.4 million for the year ended December 31, 2011 to US$0.5 million for the year ended December 31, The increase was primarily due to higher utilization levels of the car parking spaces. 86

94 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other income Other income increased by US$0.5 million, or 78.7%, from US$0.6 million for the year ended December 31, 2011 to US$1.1 million for the year ended December 31, The increase was primarily due to an increase in tenants who moved out of the Property in 2012 to find more affordable substitutes. Operating Expenses Operating expenses increased by US$1.2 million, or 9.7%, from US$12.4 million for the year ended December 31, 2011 to US$13.6 million for the year ended December 31, The increase in operating expenses was primarily due to increases in withholding tax and business tax and other taxes corresponding to the increase in rental income, partially offset by a decrease in property management fees due to the restructuring of the property management fee arrangement. General and Administrative Expenses General and administrative expenses decreased by US$77,000, or 25.4%, from US$0.3 million for the year ended December 31, 2011 to US$0.2 million for the year ended December 31, 2012 primarily due to a decrease in professional fee. Change in Fair Value of the Property There was an increase in the fair value of the Property of US$190.1 million for the year ended December 31, 2012 compared to an increase of US$158.5 million for the year ended December 31, The substantial increases in the fair value of the Property for the years ended December 31, 2011 and 2012 were the result of higher property values in Beijing, which reflected improving property market conditions. Other Losses, net Other losses, net increased by US$6.5 million from US$1.0 million for the year ended December 31, 2011 to US$7.5 million for the year ended December 31, The increase was primarily attributable to an increase in net fair value losses of derivative financial instruments and an increase in exchange losses as a result of the continued strengthening of the RMB against the U.S. dollar during Finance Income Finance income increased by US$0.1 million from US$0.2 million for the year ended December 31, 2011 to US$0.3 million for the year ended December 31, Finance Costs Finance costs increased by US$21.6 million from US$6.0 million for the year ended December 31, 2011 to US$27.6 million for the year ended December 31, The increase was primarily due to the recognition of lower foreign exchange gains on bank borrowings in 2012 as compared to 2011, mainly attributable to the lower rate of appreciation of the RMB against the U.S. dollar in 2012 as compared to

95 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Profit Profit increased by US$10.8 million, or 5.9%, from US$183.6 million for the year ended December 31, 2011 to US$194.4 million for the year ended December 31, 2012, mainly as a result of the cumulative effect of the factors described above. Financial Year ended December 31, 2011 compared against Financial Year ended December 31, 2010 Revenues Total revenues increased by US$7.5 million, or 20.2%, from US$37.2 million for the year ended December 31, 2010 to US$44.7 million for the year ended December 31, Rental income Rental income increased by US$7.0 million, or 18.9%, from US$36.7 million for the year ended December 31, 2010 to US$43.7 million for the year ended December 31, The increase was primarily due to positive rental reversion as a result of strong positive market conditions in Beijing. Car park income Car park income was US$0.4 million in each of the years ended December 31, 2010 and Other income Other income increased by US$0.5 million from US$0.1 million for the year ended December 31, 2010 to US$0.6 million for the year ended December 31, The increase was primarily due to an increase in tenants who moved out of the Property in 2011 to find more affordable substitutes. Operating Expenses Operating expenses increased by US$0.7 million, or 6.3%, from US$11.7 million for the year ended December 31, 2010 to US$12.4 million for the year ended December 31, The increase was primarily due to increases in withholding tax and business tax and other taxes corresponding to the increase in rental income. General and Administrative Expenses General and administrative expenses remained stable at US$0.3 million for the years ended December 31, 2010 and Change in Fair Value of the Property Increase in fair value of the Property was US$158.5 million for the year ended December 31, 2011 compared to an increase of US$122.1 million for the year ended December 31, The substantial increases in the fair value of the Property for the years ended December 31, 2010 and 2011 were the result of higher property values in Beijing, which reflected improving property market conditions. 88

96 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Losses, net Other losses, net decreased by US$12.8 million, or 92.6%, from US$13.8 million for the year ended December 31, 2010 to US$1.0 million for the year ended December 31, The decrease was primarily attributable to a decrease in net fair value losses of derivative financial instruments and a decrease in exchange gains as a result of fluctuations of foreign exchange rates of currencies in which part of RCA01 s bank balances and the amount due from redeemable preference shareholders were denominated. Finance Income Finance income remained stable at US$0.2 million for the years ended December 31, 2010 and Finance Costs Finance costs decreased by US$28.5 million, or 82.7%, from US$34.5 million for the year ended December 31, 2010 to US$6.0 million for the year ended December 31, The decrease was primarily due to the recognition of foreign exchange gains on U.S. dollar denominated bank borrowings in 2011, attributable to an appreciation of the RMB against the U.S. dollar, as compared to net foreign exchange losses on Japanese yen and U.S. dollar denominated bank borrowings in 2010, attributable to a depreciation of the RMB against the Japanese yen, which was partially offset by an appreciation of the RMB against the U.S. dollar. Profit Profit increased by US$84.4 million, or 85.2% from US$99.2 million for the year ended December 31, 2010 to US$183.6 million for the year ended December 31, 2011, mainly as a result of the cumulative effect of the factors described above. LIQUIDITY AND CAPITAL RESOURCES The principal sources of funding for the management of the Property have historically been from internally generated funds and loan facilities from various banks. INDEBTEDNESS As of December 31, 2010, 2011 and 2012 and June 30, 2013, bank borrowings amounted to US$465.9 million, US$472.3 million, US$477.2 million and US$500.5 million, respectively. Bank borrowings as of December 31, 2012 were classified as current liabilities as the bank borrowings were due to expire in June 2013, and such indebtedness was refinanced in January 2013 using proceeds from the Term Loan Facility. The Term Loan Facility of US$515.0 million was recognized to be US$500.5 million in the financial statements as of June 30, 2013, as such bank borrowing was carried at amortized cost in accordance with IFRS. During the Track Record Period, RCA01 complied with all terms of the loan facilities in all material respects. RCA01 currently has no committed but undrawn bank facilities. 89

97 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Historically, RCA01 entered into derivative financial instruments consisting of certain plain vanilla interest rate caps and currency options as part of its financial risk management but did not account for these as accounting hedges under IAS 39. This investment resulted in the income statement effects described above. Spring REIT intends to maintain certain of these derivative financial instruments going forward. For a detailed discussion of our derivative financial instruments, see Note 12 of the Accountant s Report set out in Appendix I to this Offering Circular. On January 10, 2013, RCA01 entered into the Term Loan Facility Agreement with Australia and New Zealand Banking Group Limited as the mandated lead arranger and bookrunner, pursuant to which a secured term loan facility of US$515.0 million was made available to RCA01 by a group of lenders for a term of three years. The Term Loan Facility has a floating interest rate of three-month LIBOR plus 3.5% per annum. The Property and RCA01 s shares, derivative financial instruments, rental receivables and all future trade receivables were pledged to secure the Term Loan Facility. In addition, RCA01 s restricted bank accounts were charged to, or otherwise subject to the control of, the security agent to secure the Term Loan Facility. The Term Loan Facility Agreement contains certain customary covenants that restrict RCA01 from (subject to certain agreed exceptions), among other things, creating security on or disposing of its assets and incurring additional indebtedness. The affirmative covenants of RCA01 include (without limitation) that RCA01 shall: make all payments and perform all its obligations in accordance with the terms of the Term Loan Facility Agreement and relevant finance documents; maintain the Property, including its use, in material compliance with all applicable governmental rules relating to health, safety, zoning, construction, building codes and environmental matters; comply with all governmental rules to which it is subject; insure the Property for its full replacement value; and submit to the facility agent its annual budget, audited annual financial statements and semi-annual financial statements at the times set out in the Term Loan Facility Agreement. RCA01 must also ensure that the following financial covenants are complied with: the ratio of loan to the aggregate value of the Property on each valuation test date shall not be greater than 60%; and the quotient of the net operating income divided by the amount of interest accruing on the loan shall not be less than The negative covenants include (but are not limited to) that RCA01 shall not, apart from certain agreed exceptions: create any charge over its existing or future assets; sell, lease, transfer or otherwise dispose of all or part of its assets; 90

98 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS enter into any amalgamation, de-merger, consolidation, merger or corporate reconstruction or reorganization; make any substantial change to the general nature of its business as a whole; wind up, liquidate or dissolve; incur, create, assume, guarantee or become liable for any financial indebtedness other than the Permitted Indebtedness (as defined in the Term Loan Facility Agreement) without prior consent; cancel, forgive or release any claim or debt owed to RCA01 by any person; or cause any material alteration to the Property. Provided that RCA01 is in compliance with the covenants under the Term Loan Facility, it may pay distributions out of available reserves. In connection with the Term Loan Facility, DBJ entered into a specified recourse obligations guarantee dated January 10, 2013 (the Specified Recourse Guarantee ) with the security agent whereby DBJ irrevocably and unconditionally guarantees the punctual and complete payment of all obligations or liabilities that the security agent, facility agent, arranger and lender are entitled to be paid under the Term Loan Facility and are actually suffered or incurred by the security agent, facility agent, arranger and lender arising out of or in connection with certain specified acts or occurrences in connection with the financing, including among other things (i) fraud, wilful misconduct, wilful breach, gross negligence or intentional misrepresentation by RCA01 or the REIT Manager; (ii) misapplication, misappropriation, theft or conversion of funds by RCA01 or the REIT Manager, (iii) failure of RCA01 to remain a single purpose entity as provided in the Term Loan Facility and (iv) any voluntary filing of insolvency proceedings by RCA01 or the REIT Manager. The Specified Recourse Guarantee remains in operation until all of the obligations under the Term Loan Facility have been paid in full. INDEBTEDNESS AS AT SEPTEMBER 30, 2013 As at September 30, 2013, borrowings of RCA01 amounted to approximately US$502,762,000, representing the Term Loan Facility available to RCA01 in January 2013, which is due to be fully repayable in January RCA01 entered into interest rate caps with notional principal amount of US$515 million to economically hedge the interest rate risk arising from the Term Loan Facility. The fair value of these interest rate caps as at September 30, 2013 was approximately US$1,201,000. CAPITAL EXPENDITURE There were no significant capital expenditures during the Track Record Period. Quantitative and Qualitative Disclosure about Market Risk RCA01 s activities expose it to a variety of financial risks, including foreign exchange risk, interest rate risk, credit risk and liquidity risk. 91

99 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Foreign exchange risk RCA01 operates in the PRC and is exposed to foreign exchange risk arising from commercial transactions, and from recognized assets and liabilities that are denominated in non-functional currencies. This is primarily with respect to the U.S. dollar. RCA01 entered into a currency option with a notional principal amount of US$370 million on June 29, 2010 to economically hedge bank borrowings denominated in U.S. dollars with a principal amount of US$370 million against the potential weakening of RMB against the U.S. dollar as of December 31, 2010, 2011 and The strike price of the currency option was RMB7/US$1, and it was exercisable on the date of maturity in June The bank loan was fully repaid on January 28, 2013 and the currency option expired upon its maturity date in June On January 10, 2013, RCA01 entered into the Term Loan Facility with principal amount US$515 million, but did not enter into any currency option in relation to the Term Loan Facility. As of June 30, 2013, RCA01 s bank borrowings amounted to US$500.5 million. Except as described above relating to the foreign currency bank borrowings, RCA01 currently does not have other foreign currency hedging arrangements. It manages its foreign currency risk by closely monitoring the movement of foreign currency rates and will consider entering into forward foreign exchange contracts to reduce its exposure should the need arise. Interest rate risk RCA01 s interest rate risk mainly arises from long-term borrowings. Borrowings issued at variable rates expose RCA01 to cash flow interest rate risk which is partially offset by cash. Under RCA01 s interest rate management policy, RCA01 generally raises borrowings at floating rates and may use interest rate caps to manage the risk where RCA01 forecasts a significant rise in interest charges in the foreseeable future. As of June 30, 2013, RCA01 had outstanding plain vanilla interest rate caps with a notional principal amount of US$515 million entered into in February 2013 to economically hedge the interest rate risk arising from the Term Loan Facility with a principal amount of US$515 million. The interest rate was capped at 1.3% until maturity of the caps in January Credit risk Credit risk arises from the potential failure of RCA01 s counterparties to meet their obligations under financial contracts. RCA01 is exposed to credit risk on its cash and cash equivalents and deposits with banks and financial institutions, derivative financial instruments as well as trade and other receivables. For deposits with banks and financial institutions, RCA01 has limited its credit exposure by restricting its selection of financial institutions to licensed banks with sound credit ratings. In respect of credit exposures to tenants, credit risk exposure is minimized by undertaking transactions with a large number of counterparties and conducting credit reviews on prospective tenants. Monthly rentals are payable in advance by tenants in accordance with their leases. RCA01 also has policies in place to ensure that rental security 92

100 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS deposits, typically equivalent to rental payments for a period of three months, are required from tenants prior to commencement of leases. It also has other monitoring procedures to ensure that follow-up action is taken to recover overdue debts. In addition, RCA01 regularly reviews the recoverable amount of each individual trade receivable to ensure that adequate provision for impairment losses is made for irrecoverable amounts. Liquidity risk Cash flow forecasting is performed by RCA01 s finance function. RCA01 s finance function monitors rolling forecasts of RCA01 s liquidity requirements to ensure it has sufficient cash to meet operational needs while maintaining sufficient headroom on its borrowing facilities at all times so that RCA01 does not breach borrowing limits or covenants (where applicable) on any of its borrowing facilities. Such forecasting takes into consideration RCA01 s debt financing plans, covenant compliance, compliance with internal Statements of Financial Position ratio targets and, if applicable, external regulatory or legal requirements. Liquidity risk management includes maintaining sufficient cash, the availability of funding from operating cashflow and seeking stable financing activities. RCA01 will continue to monitor market conditions to assess the possibility of arranging longer term refinancing at favorable rates and extending the maturity profile of its debts. The table below categorizes RCA01 s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity dates. The amounts disclosed in the table are the contractual undiscounted cash flows which comprise both interest and principal cash flows. Within 1 year Between 1 and 2 years Between 2 and 5 years US$ 000 US$ 000 US$ 000 At December 31, 2010 Accruals and other payables... 2,763 Interest payable on borrowings... 22,658 22,658 10,863 Borrowings ,000 At December 31, 2011 Accruals and other payables Interest payable on borrowings... 23,989 11,501 Borrowings ,000 At December 31, 2012 Accruals and other payables Interest payable on borrowings... 10,869 Borrowings ,000 At June 30, 2013 Accruals and other payables... 1,009 Interest payable on borrowings... 19,431 19,431 11,286 Borrowings ,000 93

101 MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital risk management RCA01 s objectives when managing capital are to safeguard RCA01 s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. RCA01 monitors capital on the basis of its gearing ratio. The gearing ratio is calculated as total borrowings divided by total assets. As of December 31, As of June 30, 2013 US$ 000 US$ 000 US$ 000 US$ 000 Total borrowings , , , ,535 Total assets ,336 1,061,778 1,266,787 1,334,827 Gearing ratio % 44.5% 37.7% 37.5% OFF-BALANCE SHEET ARRANGEMENTS As of the Latest Practicable Date, RCA01 had not entered into any off-balance sheet arrangements other than those described elsewhere in this Offering Circular relating to derivative financial instruments. RECENT DEVELOPMENTS RCA01 paid a distribution, by way of a dividend, of US$15 million to its preference shareholder, RCA Fund on November 15, The source of funding for the distribution was internally generated funds. 94

102 MANAGEMENT S DISCUSSION AND ANALYSIS OF FUTURE FINANCIAL CONDITION AND RESULTS OF OPERATIONS After the Listing Date, there will be certain changes to Spring REIT s cost structure, level of indebtedness and operations. As a result, the following discussion has been prepared to assist investors evaluation of the factors which may affect Spring REIT s future results of operations. Such statements are subject to uncertainties and assumptions, and under no circumstances should the inclusion of such information herein be regarded as a representation, warranty or prediction by Spring REIT, the REIT Manager, the Trustee, the Underwriters, the Listing Agent or any other person that the underlying assumptions will materialize. Investors are cautioned not to place undue reliance on these forwardlooking statements. OVERVIEW Spring REIT is a real estate investment trust formed primarily to own and invest in high quality income-producing real estate in Asia. Spring REIT will initially invest in and own the Property. The audited financial information of RCA01 set forth in Appendix I to this Offering Circular and the other historical financial information have been prepared based on the historical operations of RCA01. While the sources of revenues of Spring REIT will be similar to those of RCA01, its cost structure after the Listing Date will differ in certain significant respects from the historical cost structure of RCA01. Certain historical costs of RCA01, such as the asset management fee, will no longer be costs of Spring REIT and certain new costs that were not costs of RCA01 historically, such as the REIT Manager s and Trustee s fees and other trust-related expenses, will be costs of Spring REIT going forward. In addition, in accordance with the Trust Deed, distributions to Unitholders will be determined on the basis of Annual Distributable Income, which is the consolidated audited net profit after tax of Spring REIT and its special purpose vehicles for the relevant financial year adjusted to eliminate the effects of certain significant adjustments, as more specifically described in the section headed Distribution Policy in this Offering Circular. Thus, for these and other reasons described below, historical net profit after tax of RCA01 should not be treated as comparable to Annual Distributable Income. Further, the presentation format of Spring REIT s financial information may differ from that of the audited financial information set forth in Appendix I to this Offering Circular. Set forth below are details of the primary income items and other financial statement items of RCA01 that may be affected by the Global Offering and the issuance of Units to RCA Fund in exchange for all of the issued RCA01 Shares pursuant to the Reorganization Agreement. Please refer to the section headed Material Agreements and Other Documents Relating to Spring REIT Reorganization Agreement in this Offering Circular for further details of the Reorganization Agreement. SIGNIFICANT ACCOUNTING POLICIES TO BE ADOPTED BY SPRING REIT Significant policies are those that are expected to have a significant impact on the reporting of financial condition and results of operations and require management to make estimates and judgments that affect the reported results. These estimates are evaluated on an ongoing basis, based on historical experience, information that is currently available and various assumptions that management believes are reasonable under the circumstances. 95

103 MANAGEMENT S DISCUSSION AND ANALYSIS OF FUTURE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Actual results may differ from these estimates under different assumptions or conditions. Due to the different legal, financial and operating structure of Spring REIT compared to RCA01 s operations, Spring REIT will adopt certain accounting treatments that will differ in certain respects from those used in preparing the audited financial statements of RCA01. Based on the provisions of the Trust Deed, the REIT Manager expects to adopt significant accounting policies materially similar to those adopted by RCA01 as set out in Note 2 of the Accountant s Report set out in Appendix I to this Offering Circular. Significant accounting policies will require the most significant judgments and estimates in the preparation of Spring REIT s consolidated financial statements and have the most significant effect on the presentation of Spring REIT s results. In the event of any future changes to Spring REIT s business, Spring REIT may be required to adopt different or additional critical accounting policies which may be similar to those used in the preparation of the financial statements of RCA01. ADDITIONAL COST ITEMS Spring REIT will incur fees and expenses associated with the REIT structure that were not previously incurred by RCA01 in respect of the Property. Set out below are certain such additional cost items. REIT Manager s Fees Under the Trust Deed, the REIT Manager will receive: (a) (b) from the Listing Date, a Base Fee of 0.4% per annum of the Deposited Property, calculated quarterly as of the close of business on the last Business Day of each calendar quarter, and allocated rateably for any partial periods and payable quarterly in arrears within 15 calendar days after the end of each respective calendar quarter during the term of Spring REIT; and from the Listing Date a Variable Fee of 3.0% per annum of the Net Property Income (before deduction therefrom of the Base Fee and the Variable Fee) of Spring REIT. The REIT Manager currently intends to elect to receive 80% of the REIT Manager s fee for 2013 and 2014 in the form of Units. The issuance of Units to the REIT Manager as all or part of its compensation will result in dilution to the Unitholders, including the amount of distributions per Unit. The Base Fee and the Variable Fee, whether paid in cash or in Units, will be treated as an expense item in the income statement. When the Base Fee and the Variable Fee are paid in the form of Units, it will be an adjustment item that will be added back to the net profit after taxation for purposes of calculating the Annual Distributable Income. For further information on these arrangements and a detailed description of the Base Fee and the Variable Fee, see the section headed The REIT Manager Fees, Costs and Expenses of the REIT Manager in this Offering Circular. Acquisition Fee and Divestment Fee In addition to the Base Fee and the Variable Fee, under the Trust Deed, the REIT Manager is also entitled, with effect from the Listing Date, to receive an acquisition fee not exceeding 1.0% (and being 1.0% as of the date of the Trust Deed) of the acquisition price of any real estate in the form of land acquired, directly or indirectly, by Spring REIT. The acquisition fee will be paid to the REIT Manager in the form of cash or, at the election of the 96

104 MANAGEMENT S DISCUSSION AND ANALYSIS OF FUTURE FINANCIAL CONDITION AND RESULTS OF OPERATIONS REIT Manager, entirely in the form of Units or partly in cash and partly in the form of Units. Further, the REIT Manager is entitled to receive, with effect from the Listing Date, a divestment fee not exceeding 0.5% (and being 0.5% as of the date of the Trust Deed) of the sale price of any real estate in the form of land sold or divested, directly or indirectly, by Spring REIT. The divestment fee will be paid to the REIT Manager in the form of cash or, at the election of the REIT Manager, entirely in the form of Units or partly in cash and partly in the form of Units. For further information on these arrangements and a detailed description of the Base Fee and the Variable Fee, see the section headed The REIT Manager Fees, Costs and Expenses of the REIT Manager in this Offering Circular. Trustee s Fees Spring REIT s costs will also include the Trustee s Fee which will be calculated and paid semi-annually or quarterly as an ongoing fee of not more than 0.025% per annum of the value of the Deposited Property with reference to the unaudited management accounts of Spring REIT for the relevant quarter (which may be increased up to a maximum of 0.06% per annum of the value of the Deposited Property) subject to a minimum of RMB56,000 per month. In addition, Spring REIT will also pay the Trustee a one-time inception fee of HK$180,000. For further information regarding these arrangements, see the section headed The Trust Deed Trustee s Fee in this Offering Circular. The Trustee may also charge Spring REIT additional fees on a time-cost basis at a rate to be agreed with the REIT Manager from time to time, if the Trustee were to undertake duties that are of an exceptional nature or otherwise outside the scope of its normal duties in the ordinary course of normal day-to-day business operation of Spring REIT, such as acquisitions or divestments of investments by Spring REIT after the IPO. LIQUIDITY AND CAPITAL RESOURCES Upon completion of the Global Offering, net cash received from the operations of the Property will be Spring REIT s primary source of liquidity to fund cash distributions to the Unitholders, debt servicing, repairs and maintenance and other recurring operating and capital costs. Where appropriate, Spring REIT may also seek to issue further Units and debt securities and incur external borrowings (under the REIT Code, Spring REIT is only allowed to borrow up to 45.0% of total gross asset value), particularly in relation to any proposal to acquire further properties. The issue of additional equity or equity-linked securities may result in additional dilution to Unitholders. The REIT Manager will only seek to incur capital expenditures or other expenses that will enhance the Property to improve the yield or long-term value of the Property, either by improving rental rates or occupancy rates or otherwise increasing the total rentable area of the Property. Such enhancements should both increase the cash flows from the Property and the value of the Property, which may allow the REIT Manager further flexibility to borrow in accordance with the REIT Code. The Property Consultant s building condition survey report prepared by Nikken Sekkei set out in Appendix V to this Offering Circular includes a summary of cost estimates for remedial works as detailed and the ten-year forecasts of maintenance and capital expenditure. 97

105 MANAGEMENT S DISCUSSION AND ANALYSIS OF FUTURE FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of June 30, 2013, RCA01 did not have any contractual commitments or obligations to make any capital expenditures. WORKING CAPITAL STATEMENT Taking into consideration the financial resources available to Spring REIT, including its internally generated funds, the Term Loan Facility and the estimated net proceeds of the Global Offering, the REIT Manager believes that Spring REIT has sufficient liquid assets to meet its working capital and operating requirements for the 12 calendar months following the date of this Offering Circular. NO MATERIAL ADVERSE CHANGE The REIT Manager confirms that, having performed reasonable due diligence on Spring REIT and RCA01, there has been no material adverse change in Spring REIT s and RCA01 s financial or trading position or prospects since June 30, 2013, which is the end of the period covered by the Accountant s Report set out in Appendix I to this Offering Circular. 98

106 PROFIT FORECAST Statements contained in this profit forecast section that are not historical facts may be forward-looking statements. Such statements are based on the assumptions set forth in this section and are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Under no circumstances should the inclusion of such information herein be regarded as a representation, warranty or prediction by Spring REIT, the REIT Manager, the Trustee, the Underwriters, the Listing Agent or any other person involved in the Global Offering with respect to the accuracy of the underlying assumptions used in preparing the profit forecast or that the profit forecast results will be achieved or are likely to be achieved. None of Spring REIT, the REIT Manager, the Trustee, the Underwriters, the Listing Agent or any other person involved in the Global Offering guarantees the performance of Spring REIT or the payment of any (or any particular) return on the Units. Investors are cautioned not to place undue reliance on these forward-looking statements which are made only as of the date of this Offering Circular. See the section headed Risk Factors Risks Relating to an Investment in the Units The forward-looking and certain other information in this Offering Circular may prove inaccurate in this Offering Circular. The profit forecast (including the underlying assumptions), for which the REIT Manager is responsible, has been approved by the Board. The profit forecast has been prepared on the bases and assumptions set out below and in accordance with IFRS and is consistent in all material respects with those accounting policies to be adopted by Spring REIT, which are materially similar to those adopted by RCA01 in the Accountant s Report set out in Appendix I to this Offering Circular. The forecast income statement data of Spring REIT on the following pages of this Offering Circular has been prepared on a consolidated basis, reflecting the forecast consolidated income statement of Spring REIT, which comprises Spring REIT and RCA01, for the period from the Listing Date to December 31, 2013 (the Profit Forecast Period ). The profit forecast assumes that the Listing Date will be December 5, 2013 and will vary if the Listing Date is different. The audited financial results of RCA01 in this Offering Circular only cover the years ended December 31, 2010, 2011 and 2012 and the six months ended June 30, The financial information relating to RCA01 for the period from July 1, 2013 to the Listing Date has not been prepared by the REIT Manager and the financial results of RCA01 for such period have neither been audited nor reviewed. In preparing the profit forecast, the REIT Manager has made certain assumptions with respect to the operations of Spring REIT as set out below. To the extent that the REIT Manager has not identified events that have occurred or may occur in respect of RCA01 during the period from July 1, 2013 to the Listing Date, the impact of such events on the future results of Spring REIT has not been taken into account in the profit forecast. Investors should note that for reasons stated herein, in arriving at the consolidated forecast results of Spring REIT, it has been assumed that there will be no change in the price of the Units during the Profit Forecast Period. Should the market value of the Property as of December 31, 2013 drop below or increase above the Appraised Value of the Property as of June 30, 2013, the deficit or surplus, together with any associated deferred taxation, would be charged to the income statement. However, such deficit or surplus (after taking into account any associated deferred taxation), which is non-cash in nature, would not reduce or increase the Annual Distributable Income for the Profit Forecast Period. Investors should also note that the format and individual line items in Spring REIT s future financial reports and statements may differ from those used for the purposes of the profit forecast and such line items should not be viewed as individual 99

107 PROFIT FORECAST forecasts but form part of the bases and assumptions used in arriving at the distributable income for the Profit Forecast Period. The profit forecast should be read together with the letters set out in Appendix III headed Letters in Relation to the Profit Forecast and Appendix IV headed Independent Property Valuer s Valuation Report to this Offering Circular and the principal bases and assumptions set out below. The profit forecast and calculations made in preparing the profit forecast have been reviewed by PricewaterhouseCoopers and the Listing Agent. Please refer to Appendix III for the letters from PricewaterhouseCoopers and the Listing Agent on the accounting policies adopted and the calculations made in arriving at the profit forecast. The REIT Manager and the Listing Agent consider the assumptions made in arriving at the profit forecast to be reasonable. Spring REIT will incur expenses at the trust level (such as the REIT Manager s fees, the Trustee s fees and annual listing fees), which expenses were not incurred before the Listing Date (see the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations in this Offering Circular). Having regard to the various factors noted above, investors should exercise caution when relying on the profit forecast generally and, in particular, (a) investors should exercise the highest caution in making any comparison, whether as to individual line items or overall financial performance, as between Spring REIT s forecast income statement set forth below and any historical financial results of RCA01 and (b) investors should not treat any individual line item in Spring REIT s forecast income statement as a forecast in its own right. 100

108 PROFIT FORECAST PROFIT FORECAST FOR THE PROFIT FORECAST PERIOD The following table sets forth Spring REIT s forecast consolidated profit and loss data and distribution for the Profit Forecast Period. For the Profit Forecast Period US$ 000 Revenue Rental income... 5,103 Car park income Other income ,143 Operating expenses Property management fee... (103) Property taxes... (284) Business tax and other taxes... (301) Withholding tax... (514) Insurance... (13) Leasing commissions... (71) Others... 0 (1,286) General and administrative expenses Asset management fee... 0 Professional fee... (45) (45) Trust and IPO-related expenses REIT Manager s fee... (419) Trustee fees and other trust expenses... (201) (620) Increase in fair value of investment property (1)... 0 Other losses, net... (59) Operating profit... 3,133 Finance income Finance costs... (1,958) Profit for the period... 1,197 Distribution data: Profit for the period... 1,197 Adjustments (2) Distributable income for the Profit Forecast Period... 2,

109 PROFIT FORECAST For the Profit Forecast Period Minimum Offer Price Maximum Offer Price Offer price (HK$) Assumed number of Units outstanding as of December 31, 2013 for the Profit Forecast Period (in millions) (3)... 1,099 1,099 Forecast distribution per Unit ( DPU ) (HK$) Annualized DPU (HK$) Forecast annualized distribution yield (4) % 4.94% Notes: (1) The forecast valuation of the investment property held by the Spring REIT (being the Property) as of the Listing Date and December 31, 2013 is based on the Appraised Value of the Property by the Independent Property Valuer as of August 31, The REIT Manager forecasts that there will be no material change in the fair value of investment property in the Profit Forecast Period. (2) Adjustments are made to add back (i) US$59,000 in respect of the losses in fair value of derivative financial instruments, (ii) US$335,000 in respect of the portion of the REIT Manager s fee to be paid in the form of Units, and (iii) US$497,000 in respect of the non-cash loan arrangement fees amortized under finance costs. (3) For the purpose of calculating the DPU of the Units held by Unitholders as of December 31, 2013 for the FY2013 Distribution Period set forth in the table above, it is assumed the number of Units issued and outstanding remains unchanged, and includes the estimated number of Units to be issued as the REIT Manager s fee of approximately 644,000 Units based on the Maximum Offer Price and approximately 681,000 Units based on the Minimum Offer Price for the Profit Forecast Period. (4) The annualized forecast distribution yields are provided for illustrative purposes only. The annualized actual distribution yield may differ from the annualized forecast distribution yields based on the forecast DPU for the Profit Forecast Period. The annualized forecast distribution yields have been calculated with reference to the Minimum Offer Price and Maximum Offer Price only. Such yields will vary for investors who purchase Units in the secondary market at a market price that differs from the Minimum Offer Price and the Maximum Offer Price or for investors who do not hold Units for the entire Profit Forecast Period. No forecast of profits or DPU whatsoever is made in respect of any period ending after the Profit Forecast Period. None of Spring REIT, the REIT Manager, the Trustee, the Underwriters, the Listing Agent or any other person involved in the Global Offering guarantees the performance of Spring REIT, the repayment of capital or the payment of any distributions, or any particular return on the Units. The profit forecast and forecast annualized distribution yields stated in the table above are calculated based on the Maximum Offer Price and the Minimum Offer Price. Such distribution yields will vary for investors who purchase Units in the secondary market at a market price that differs from the Maximum Offer Price and the Minimum Offer Price or for investors who do not hold Units for the entire Profit Forecast Period. The actual performance of Spring REIT for the Profit Forecast Period together with the profit forecast will be presented in Spring REIT s next annual report for comparison. BASES AND ASSUMPTIONS The REIT Manager has prepared the profit forecast for the Profit Forecast Period based on the assumptions listed below. The REIT Manager considers these assumptions to be appropriate and reasonable as of the date of this Offering Circular. However, recipients of this Offering Circular and all prospective investors in the Units should consider the profit forecast in the light of such assumptions and make their own assessment of the future performance of Spring REIT. 102

110 PROFIT FORECAST REVENUE Revenue is derived from (a) rental income; (b) car park income; and (c) other income from the Property. Rental income Rental income represents primarily the amounts paid by tenants under their lease agreements and signage revenues, but does not include building management fees as building management fees are paid directly to the Building Manager. Rents paid under lease agreements are typically fixed for three years, but may vary for certain lease agreements. The forecast rental income is calculated based on the contracted rents receivable under existing leases plus expected income on renewed leases or new leases, and are adjusted for rent free periods and fit-out periods annualized over the lease terms. A tenant-by-tenant analysis has been conducted on the likelihood of renewal of each expiring lease using factors such as the market situation and ongoing dialogue with the relevant tenants. Rental income for the Profit Forecast Period is forecast to be US$5.1 million, calculated on a pro-rata basis of the forecast rental income for the month of December 2013 (based on the number of days between the Listing Date and December 31, 2013). The following table sets forth a breakdown of the forecast rental income from the Property attributable to the different categories of tenants for the Profit Forecast Period: Percentage of rental income for Categories of tenants the Profit Forecast Period Existing lease agreements as of June 30, 2013 and committed renewals and new leases that will commence after June 30, % Expected renewals or new leases entered into on or after the date of this Offering Circular... 6% Occupancy rates assumption The average occupancy rate of the Property for the Profit Forecast Period is forecast to be approximately 94%, which is comparable to the historical occupancy rates of the Property. Rental rates assumption The rental rates for expected new tenancies entered into during the Profit Forecast Period are assumed to be the current prevailing market spot rent, which is RMB410 per sq.m. per month. If a tenancy is scheduled to expire during the Profit Forecast Period, the rental rates under the renewed tenancy are forecast to be RMB390 per sq.m. per month, as observed from lease agreements that were recently entered into. According to DTZ, the monthly effective rent of Premium Grade office buildings in the CBD of Beijing in the first quarter of 2013 reached RMB453.9 per sq.m., which represents a premium of approximately 11% and 16% to the current prevailing market spot rent and the forecast rental rate for renewals, respectively. The REIT Manager took into account the profile, the operations and leasing history of the tenants in forecasting the retention rate. The REIT Manager believes that, in the absence of unforeseen circumstances, the forecast new and renewal rental rates at RMB410 per sq.m. per month and RMB390 per sq.m. per month, respectively, are justifiable and achievable. 103

111 PROFIT FORECAST The historical and forecast average leased Unit Rent for the Property are as follows: Year ended December 31, 2011 Year ended December 31, 2012 Six months ended June 30, 2013 Profit Forecast Period RMB RMB RMB RMB Average leased Unit Rent Car park income Car park income comprises income derived from the operation of the Property s car parking spaces. Car park income is forecast to be US$40,000 for the Profit Forecast Period, calculated on a pro-rata basis of the forecast car park income for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). Other income Other income represents compensation paid by tenants for early termination of leases. The early termination of leases occurred in the previous years were mainly attributable to the sharp increase in market rental levels, which resulted in certain tenants moving to alternative locations with lower rental rates. The REIT Manager expects no early termination in the Profit Forecast Period as the office rental market has stabilized and tenants are in general more receptive to rental increase. Hence, no other income has been included in the profit forecast. OPERATING EXPENSES Property management fee Under the Property Management Agreement, the Property Manager receives a fee equivalent to 2.0% of the total monthly revenue of the Property on a monthly basis. For the Profit Forecast Period, the property management fees are forecast to be US$0.1 million, calculated on a pro-rata basis of the forecast property management fees for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). Property taxes Property taxes represent real estate tax and land use tax. RCA01 currently pays real estate tax based on the residual value of the Property. For land use tax, it is forecast that the same land use tax rate will apply in the Profit Forecast Period. Property taxes are forecast to be US$0.3 million for the Profit Forecast Period, calculated on a pro-rata basis of the forecast property taxes for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). Business tax and other taxes Business tax and other taxes mainly include (i) business tax, urban construction and maintenance tax and educational surcharge and (ii) stamp duty. Business tax, urban construction and maintenance tax and educational surcharge is forecast to be 5.6% of the total revenue for the Profit Forecast Period. Stamp duty is charged at 0.1% on the total aggregate rental income payable over the term of each lease agreement. Business tax and other taxes are forecast to be US$0.3 million for the Profit Forecast Period, calculated on a pro-rata basis of the forecast business tax and other taxes for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). 104

112 PROFIT FORECAST Withholding tax In respect of the rental income derived from the PRC, RCA01 is currently subject to withholding income tax rate at 10.0%. The withholding tax rate is forecast to remain the same and the withholding tax is forecast to be US$0.5 million for the Profit Forecast Period. Insurance Comprehensive insurance has been arranged for the Property, including property all risk insurance, business interruption insurance and public liability insurance. The insurance expenses for the Profit Forecast Period are forecast to be US$13,000, approximately pro rata of the average expenses incurred in the two years ended December 31, 2011 and 2012, based on the number of days from the Listing Date to December 31, Leasing commissions Leasing commissions equivalent to one month of rental are paid for securing new tenants for the Property. For the Profit Forecast Period, leasing commissions are forecast to be US$71,000. Other expenses Except for expenses mentioned above, the remaining expenses are considered to be non-recurring items and/or immaterial. Hence, no other expenses have been included in the profit forecast. GENERAL AND ADMINISTRATIVE EXPENSES Asset management fee Asset management fee represents the fee payable to AD Capital for the provision of asset management services, in accordance with a management agreement entered into between AD Capital and RCA01 in January As the management agreement will be terminated prior to listing, the asset management fee is forecast to be nil during the Profit Forecast Period. Professional fees Professional fees comprise legal and consultant fees in relation to cash repatriation from onshore to offshore. Professional fees are forecast to be US$45,000 for the Profit Forecast Period. TRUST AND IPO-RELATED EXPENSES REIT Manager s fee The REIT Manager s fee includes a Base Fee and a Variable Fee. The Base Fee is 0.4% per annum of the value of the Deposited Property. The Variable Fee is 3.0% per annum of the Net Property Income (before deduction therefrom of the Base Fee and the Variable Fee). No acquisition or divestment fees are assumed during the Profit Forecast Period. It is forecast that 80% of the REIT Manager s fee will be paid in the form of Units, which will be issued at the prevailing market price as defined in the Trust Deed, and the remaining in the form of cash. For the Profit Forecast Period, the REIT Manager s fee is forecast to be US$0.4 million, calculated on a pro-rata basis. 105

113 PROFIT FORECAST Trustee fees and other trust expenses The Trustee fees include (i) a one-time inception fee of HK$180,000, and (ii) an ongoing fee of up to 0.025% per annum of the value of the Deposited Property (subject to a minimum of RMB56,000 per month). Other trust expenses include annual audit and tax advisory fees, valuation fees, legal fees, listing fees, register fees, annual report printing fees, distribution fees and other trust related expenses. For the Profit Forecast Period, the Trustee s fees and other trust expenses are forecast to be US$0.2 million. INCREASE IN FAIR VALUE OF INVESTMENT PROPERTY The REIT Manager, based on its best estimate, is of the view that the estimated fair value of the investment property, being the Property, as of the Listing Date and December 31, 2013 will not materially change from the fair value as of August 31, The Independent Property Valuer is of the opinion that the fair value of the investment property estimated by the REIT Manager is reasonable and does not materially deviate from the market anticipation of the office sector market. While the REIT Manager has considered for the purposes of the profit forecast what it believes is the best estimate of the fair value of the Property as of December 31, 2013, the actual fair value as of 31 December 2013, as subsequently appraised by the Independent Property Valuer, and the fair value change for the Profit Forecast Period, may differ materially from the REIT Manager s estimate and are dependent on market conditions and other factors that are beyond the REIT Manager s control. The valuation bases for the forecast valuation of the investment property as at December 31, 2013 are consistent with the approaches undertaken by the Independent Property Valuer in Appendix IV to this Offering Circular. OTHER LOSSES, NET Other losses, net, include (i) net fair value change in derivative financial instruments at fair value through profit or loss, (ii) foreign exchange gains or losses, (iii) payables written off and (iv) other miscellaneous gains or losses. It is forecast that there will be fair value losses of derivative financial instruments arising from the decrease in the option value over time, calculated using the straight line method. Save for the net fair value losses of derivative financial instruments, it is forecast that there will be no other material changes in other losses, net for the Profit Forecast Period because (i) it is forecast that the foreign exchange rate will not change materially from its prevailing rate and (ii) other items are non-recurring in nature and it is not expected that such items will appear in the Profit Forecast Period. For the Profit Forecast Period, Other losses, net, are forecast to be US$59,000. FINANCE INCOME Finance income is forecast based on the average cash balance, including both restricted bank balances and cash and cash equivalents, at an applicable interest rate. The interest rate used in the Profit Forecast Period for finance income is 0.30% on a blended basis. For the Profit Forecast Period, finance income is forecast to be US$22,000, calculated on a pro-rata basis of the forecast finance income for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). 106

114 PROFIT FORECAST FINANCE COSTS Finance costs are forecast based on the terms of the existing Term Loan Facility. Finance costs represent the interest expenses payable on bank borrowings and upfront finance costs to be amortized over the life of the Term Loan Facility. During the Profit Forecast Period, amortized finance costs are calculated on a pro-rata basis of the forecast costs for the month of December 2013 (based on the number of days from the Listing Date to December 31, 2013). It is forecast that there will be no repayment or new borrowings during the Profit Forecast Period. Finance costs are forecast to be US$2.0 million for the Profit Forecast Period. ADJUSTMENTS Annual Distributable Income for the Profit Forecast Period is arrived at after eliminating the effects of the Adjustments from the consolidated audited net profit after tax. The Adjustments for the Profit Forecast Period are forecast to be US$0.9 million, which consists of US$59,000 in respect of the losses in fair value of derivative financial instruments; US$335,000 in respect of the portion of the REIT Manager s fee to be paid in the form of Units; and US$497,000 in respect of the non-cash loan arrangement fees amortized under finance costs. EXCHANGE DIFFERENCE ON TRANSLATION ON FINANCIAL STATEMENTS No assumption has been made as to any change in the foreign exchange rate during the Profit Forecast Period as there is no reliable basis for determining such rate as at any future date. ACCOUNTING STANDARDS The REIT Manager has assumed no change in applicable accounting standards or other financial reporting requirements that may have a material effect on the forecast net operating profit during the Profit Forecast Period. The accounting policies to be adopted by Spring REIT are set out in the section headed Management s Discussion and Analysis of Future Financial Condition and Results of Operations Significant Accounting Policies to be Adopted by Spring REIT in this Offering Circular. OTHER ASSUMPTIONS The REIT Manager has made the following additional assumptions in preparing the profit forecast for the Profit Forecast Period: there will be no material change in the existing political, legal, fiscal, market or economic conditions in Hong Kong or the PRC or any other country or territory, which may materially and adversely affect the business of Spring REIT; there will be no change in legislation, regulations or rule in Hong Kong or the PRC, or any other country or territory, which may materially and adversely affect the business of Spring REIT; 107

115 PROFIT FORECAST Spring REIT s operation and business will not be severely interrupted by any force majeure events, unforeseeable factors, or unforeseeable reasons that are beyond the control of the Directors, including the occurrence of natural disasters, catastrophes (such as floods and typhoons), epidemics or serious accidents; exchange rates and interest rates will not differ materially from those presently prevailing for the Profit Forecast Period; there will be no material change in the bases or applicable rates of taxation in the countries in which Spring REIT operates or in the countries in which Spring REIT or any of its subsidiaries were or will be incorporated; during the Profit Forecast Period, other income or non-recurring items is not expected to be significant; there will be no further capital raising during the Profit Forecast Period after the Listing; it is currently assumed that the structure of the Global Offering will comprise: (i) the sale of Sale Units by the Selling Unitholder and (ii) the sale of New Units to be issued by Spring REIT. The net proceeds to be raised by Spring REIT from the sale of New Units in the Global Offering are intended to be used for the partial early repayment of the Term Loan Facility; all costs and expenses of the Global Offering in connection with the listing of the Spring REIT are to be paid by RCA Fund. Approximately 22.3% of the total estimated underwriting commission, which represents the approximate size of the primary portion of the Global Offering, will be reimbursed by Spring REIT to RCA Fund; all leases are enforceable and will be performed in accordance with their terms as amended from time to time; Spring REIT will continue to enjoy its existing banking and credit facilities at the prevailing interest rates, terms and conditions; Spring REIT s operations will not be adversely affected by interruptions of any supplies, labor disputes, commercial litigation, or for any reasons that are beyond the control of the Directors; Spring REIT s operations, results and financial condition will not be materially and adversely affected by the risk factors set out in the section headed Risk Factors in this Offering Circular; the property portfolio of Spring REIT will comprise only the Property throughout the Profit Forecast Period; the US$/RMB exchange rate used throughout the Profit Forecast Period is assumed to remain constant at US$1.00 = RMB6.21 = HK$7.75; there will be no material change in the physical condition of the Property; Spring REIT intends to distribute 100% of Annual Distributable Income to Unitholders for the Profit Forecast Period, and distribution reinvestment arrangement will not be triggered; 108

116 PROFIT FORECAST during the Profit Forecast Period, Spring REIT s derivative financial instruments are expected to experience fair value losses arising from the decrease in option value over time; and the Reorganization is expected to have no financial impact on Spring REIT s consolidated income statement. SENSITIVITY ANALYSIS The profit forecast and forecast distributions included in this Offering Circular are based on a number of assumptions that have been outlined above and are subject to a number of risks as outlined in the section headed Risk Factors in this Offering Circular. Prospective investors should be aware that future events cannot be predicted with any certainty and deviations from the figures forecast in this Offering Circular are to be expected. To assist prospective investors in assessing the impact of some but not all assumptions on the annualized DPU, the following tables demonstrate the sensitivity of the annualized DPU to certain changes in assumptions as set forth below. It should also be noted that annualized DPU as discussed below assumes that the REIT Manager will distribute to Unitholders 100% of the Annual Distributable Income for the Profit Forecast Period and will distribute no additional amounts out of capital. Accordingly, the sensitivity illustrations are based exclusively on movements of the specified items in Annual Distributable Income resulting from the circumstances considered, holding all other assumptions and metrics unchanged. The illustrations are not profit forecasts for the purposes of the relevant rules or any other purpose and accordingly have not been reported on by the reporting accountant. Prospective investors should be aware that the sensitivity analysis is not intended to be exhaustive and is limited in scope in that not all principal assumptions or other assumptions which are relevant to the figures forecast or projected in this Offering Circular have been examined or reviewed in this sensitivity analysis. Care should be taken in interpreting these sensitivities. These sensitivities treat each movement in the variables in isolation and hold all other assumptions and metrics unchanged whereas, in practice, the movements could be interdependent and such movements may lead to changes in other metrics. The effects of movements may offset or compound each other. Accordingly, the effect on the profit forecast presented for each sensitivity is not intended to indicate the likely range of outcomes with respect to each sensitivity. No attempt is made to identify the cause of any potential variation, or to identify or quantify any consequential or related changes or variations in other lines. 109

117 PROFIT FORECAST Results of a sensitivity analysis of the impact of changes in revenue, operating expenses, cost of borrowing and fair value of investment property of Spring REIT on the forecast profit for the Profit Forecast Period are as follows: Change in annualized profit per Unit Change in annualized DPU Total revenue 5.0% increase in total revenue % 12.3% 5.0% decrease in total revenue... (21.5%) (12.3%) Operating expenses 5.0% increase in operating expenses... (5.4%) (3.1%) 5.0% decrease in operating expenses % 3.1% Cost of borrowing 0.5% increase in interest rate... (15.9%) (9.1%) 0.5% decrease in interest rate % 9.1% Property valuation 5.0% increase in fair value of investment property (US$62.7 million) % 0.0% (1) 5.0% decrease in fair value of investment property (US$62.7 million)... (387.4%) 0.0% (1) Note: (1) Holding all other assumptions and metrics unchanged, the change in fair value of investment property will not affect distributable income as it is non-cash in nature and will be adjusted. 110

118 STATEMENT OF DISTRIBUTIONS None of Spring REIT, the REIT Manager, the Trustee, RCA Fund, AD Capital, the Underwriters, the Listing Agent, any of their respective directors, agents, employees or advisors or any other persons involved in the Global Offering guarantees the performance of Spring REIT, the repayment of capital or the payment of any (or any particular) return on the Units. Period from the Listing Date to December 31, 2013 Unitholders will be paid, in the absence of unforeseen circumstances, a forecast DPU of HK$0.015 in respect of the period from the Listing Date to December 31, 2013, representing an annualized distribution yield of 4.94% based on the Maximum Offer Price (excluding other transaction costs) and 5.23% based on the Minimum Offer Price (excluding other transaction costs) assuming no new Units will be issued during such period and which is not restricted from being paid out of the capital of Spring REIT in the event this exceeds the distributable income for the period. The annualized forecast distribution yields are provided for illustrative purposes only. The annualized actual distribution yield may differ from the annualized forecast distribution yields based on the forecast DPU for the period from the Listing Date to December 31, Bases and Assumptions The above forecast distribution yields are calculated based on the Maximum Offer Price and Minimum Offer Price (excluding other transaction costs). The distribution yield obtained by investors who purchase Units in the secondary market at a market price that differs from the Maximum Offer Price or Minimum Offer Price (excluding other transaction costs), calculated using such secondary market purchase price, will accordingly differ from the distribution yields stated above. It is also assumed that the anticipated Listing Date is December 5, 2013 and the distributions and the distribution yield will vary if the actual Listing Date is different. 111

119 UNAUDITED PRO FORMA STATEMENTS OF FINANCIAL POSITION The unaudited pro forma statements of financial position have been prepared based on the audited statement of financial position of RCA01 as at June 30, 2013 as set out in Appendix I to this Offering Circular, and to show the effect of (i) the acquisition of the entire equity interest in RCA01 by Spring REIT, (ii) the issuance of the New Units pursuant to the Global Offering, and (iii) the repayment of US$49,431,000 and US$46,733,000 of the Term Loan Facility as if they had taken place on June 30, 2013 based on the Maximum Offer Price and Minimum Offer Price, respectively. For further details, including unaudited pro forma statements of financial position of Spring REIT as of June 30, 2013 based on the Maximum Offer Price and the Minimum Offer Price (for illustrative purposes only), please refer to Appendix II to this Offering Circular. 112

120 INDUSTRY OVERVIEW DTZ was commissioned by the REIT Manager to prepare a report on the Grade A and Premium Grade office property market in Beijing, the PRC and the following is primarily based on DTZ s report. The REIT Manager believes that the sources of certain information below are appropriate sources for such information and has taken reasonable care in extracting and reproducing such information. The REIT Manager has no reason to believe that such information is false or misleading or there is omission of any other information which will render the information below to be false or misleading. The information has not been independently verified by the REIT Manager, the Trustee, the Listing Agent or any other party involved in the Global Offering (except for DTZ as appropriate in respect of the relevant parts of its report) and no representation is given as to its accuracy. PRC Economic Overview China s economy has grown rapidly since the beginning of reforms towards a marketoriented economy in China became the second largest economy in the world in terms of GDP measured at real exchange rates in With a real GDP growth rate of 7.8% in 2012, the Chinese economy remained among the fastest growing economies in the world. The PRC Government is targeting an annual real GDP growth of approximately 7.0% for the 12th five year plan period (2011 to 2015). Key Economic Indicators for China Nominal GDP (RMB billion)... 26, , , , , ,932.2 Real GDP Growth Rate (%) Per Capita GDP (RMB)... 20, , , , , ,420.0 Fixed Asset Investment (FAI) (RMB billion)... 13, , , , , ,467.6 Foreign Direct Investment Actual Utilized (USD 100 billion) Source: National Bureau of Statistics of China Beijing Economic Overview Beijing is located in the North China Plain and has a permanent population of 20.7 million as of As the capital city of China, Beijing takes on the role within the country as the center of politics, culture, education and international affairs. Moreover, it is the management and decision-making center of China s economy, with a high concentration of government institutions. Because of its unique advantage as the capital city, Beijing has attracted both domestic companies and multi-national corporations to locate their headquarters in Beijing. In particular, according to U.S. Fortune Magazine, a total of 44 Fortune 500 companies were headquartered in Beijing by the end of 2012, the second highest number of all cities in the world. 113

121 INDUSTRY OVERVIEW Beijing Annual Nominal GDP from 2003 to 2012 RMB billion 2,000 1,800 1,600 1,400 1,200 1, Source: Beijing Municipal Statistics Bureau, March 2013 Beijing s economy has grown rapidly from 2003 to 2012, with its nominal GDP experiencing an average annual growth rate of approximately 15.2% during that period. In 2012, Beijing s nominal GDP reached RMB1,781.9 billion, which is the second highest nominal GDP in China, after Shanghai. DTZ expects that Beijing s economy will continue to remain strong under the steady growth measures released by the PRC Government. According to the Beijing City Master Plan ( ), the Beijing Municipal Government planned to transform Beijing into an international metropolis and to further expand the city s economic catchment. Beijing s per capita GDP is targeted to reach US$10,000 by 2020, of which the tertiary sector is targeted to contribute more than 70%. In particular, Chaoyang district, where the Property is located, is within the urban core area and is positioned as the standard bearer of Beijing s image as a political, cultural, media and commercial center according to DTZ. Beijing has undergone a rapid development phase in the past eight years. The city s urbanization rate has been over 80.0% since 2005, and reached 86.2% in 2012, which is as high as that of developed countries. DTZ expects that the urbanization rate will reach 89% by Rapid urbanization has led to a continuing demand for urban housing and other real estate products, as well as enhancing the economic structure of the city. Beijing s Infrastructure Development Beijing enjoys a comprehensive transportation network, which includes highways, railways, subways and an international and domestic airport. Beijing s highways had an aggregate length of 21,454 k.m. in 2012, of which approximately 923 k.m. were intercity expressways linking Beijing with cities such as Tianjin, Shenyang, Harbin, Shanghai, Chengde, Baotou and Shijiazhuang. Beijing is also one of the largest railway hubs in northern China. There are nonstop trains between Beijing and most large-sized and medium-sized cities in northern China. The commencement of the operations of Beijing-Shanghai and Beijing-Guangzhou high-speed railways in 2011 and 2012, respectively has significantly shortened the travel time between Beijing and Shanghai and Beijing and Guangzhou. In addition to the highway and railway networks, Beijing also has a well-developed subway network. As the first city to construct a subway system in China, Beijing s subway system has experienced rapid development in recent years. Beijing s subway system expanded to 17 lines with a total operation length of k.m. in 2012 from eight lines with a total operation length of 200 k.m. in Beijing plans to further increase the subway operation length to k.m. by 2015 and to over 1,000 k.m. by

122 INDUSTRY OVERVIEW Beijing Capital International Airport is the largest and busiest international aviation hub in China. It has three terminals and its annual passenger throughput reached 75.4 million by the end of November 2012, which was ranked second highest in the world, according to Airports Council International. Moreover, the construction of a second capital international airport, which will be located in Lixian Town in Daxing District, south of Beijing city, has been approved by the State Council. DTZ believes that the operation of the two airports will help to make Beijing more competitive as an international metropolis. Beijing Real Estate Market An increase in disposable income per capita, high growth in urbanization rates and rapid infrastructure development in Beijing have facilitated the growth of Beijing s real estate market. From 2003 to 2012, real estate development investment in Beijing increased from approximately RMB120.3 billion in 2003 to approximately RMB315.3 billion in 2012, representing a CAGR of approximately 11.3%. Beijing s real estate market has maintained a general growing trend since 2009 after the global financial crisis. However, starting in 2010, the PRC Government implemented restrictive policy measures aiming to avoid an asset bubble developing in the PRC, especially in the residential sector. In response, investments in the residential sector decreased, while real estate investment in the office sector remained strong and reached RMB38.5 billion in 2012, representing a year-on-year 5.8% growth from According to DTZ, this is partly due to investors diversifying their portfolios from the residential sector, which has been heavily regulated by the PRC Government, to other real estate sectors, as well as the limited new supply of offices in Beijing since Beijing Real Estate Investment between 2003 and 2012 RMB billion Total Investment in Real Estate 115

123 INDUSTRY OVERVIEW RMB billion Total Investment in Office Market Source: Beijing Municipal Statistics Bureau, March 2013 Beijing Grade A Office Market Overview Along with the growth of the urban population, Beijing has enjoyed a rapid growth in working population, which reached approximately 10.7 million in 2011, and a steady growth in disposable income per capita. The increasing working population and the rapidly developing tertiary industry in recent years have primarily driven the demand for office property in Beijing. Location Distribution of Major Business Districts in Beijing 4 th Ring Road Zhongguancun 3 rd Ring Road To the Airport 2 nd Ring Road Lufthansa East 2 nd Ring Road Financial Street Chang an Ave. Forbidden City Tiananmen Square East Chang an Ave. Central Business District China Central Place Data Source: DTZ Consulting, March 2013 After almost 30 years of development, there are six core business districts in Beijing s Grade A office market, namely the CBD, East Second Ring Road, East Chang an Avenue/ Jianguomen, Financial Street, Lufthansa, and Zhongguancun districts. In addition, Wangjing is also emerging as a new business district with Grade A office developments. 116

124 INDUSTRY OVERVIEW Supply, Demand and Rent Grade A Office Stock by Major Business Districts in Beijing Others, 9.7% Zhongguancun, 11.3% CBD, 36.4% Lufthansa, 10.4% Financial Street, 15.7% East Chang'an Avenue/Jianguomen, 12.3% East 2nd Ring Road, 4.2% Data Source: DTZ Consulting, March 2013 The Grade A office stock in Beijing increased from 5.4 million sq.m. in 2007 to 6.7 million sq.m. in the first quarter of By district, the CBD has the highest number of high-end office properties, followed by Financial Street, accounting for 36.4% and 15.7%, respectively, of overall stock as of the first quarter of Supply, Demand and Occupancy of Grade A Office in Beijing Sq.m., GFA 1,000, , , , , , , , , , Q New Supply Net Absorption Occupancy Rate 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% Data Source: DTZ Consulting, March 2013 A large supply of new Grade A office buildings emerged in the Beijing market in 2007 and 2008, with an average annual supply of approximately 780,000 sq.m. The large supply was supported by a strong demand from multi-national corporations and domestic companies for good quality office buildings. However as the result of the global economic crisis in 2008 and 2009, there was a sharp decrease in the supply of Grade A office in Beijing since

125 INDUSTRY OVERVIEW Beijing s economy rebounded quickly and Beijing Grade A office market experienced strong demand from 2010 due to the limited supply in key business districts. The average occupancy rate for Grade A office space in Beijing was 98.0% in the first quarter of There is a general upward trend in the rent of Grade A office in Beijing, except the fall in 2009 amidst the global financial crisis. According to DTZ, the effective rent of Beijing Grade A offices increased substantially from 2009 to 2012 and reached RMB294.5 per sq.m. per month in 2012, which was supported by the improving economy and limited supply for Grade A office space over the past few years. This increasing trend continued into the first quarter of Monthly effective rent per sq.m. of Beijing s Grade A offices was RMB298.2 in the first quarter of Financial Street and the CBD command the highest Grade A office rental levels in Beijing. The effective rent in the CBD reached RMB333.3 per sq.m. per month by the end of the first quarter of Data Source: DTZ Consulting, March 2013 Beijing Grade A Office Rent RMB/sq.m./month Q Effective Rent Indicative Asking Rent Supply and Rental Forecast According to DTZ, future Grade A office supply in Beijing is expected to be approximately 1.1 million sq.m. in total between 2013 and 2016 with an average annual supply of approximately 275,183 sq.m., which is only 54.3% of the average annual supply during the period from 2007 to Therefore, DTZ expects that the shortage in Grade A office supply will continue in Beijing in the next few years. Considering the limited supply and the growing strong demand for Grade A office space, DTZ expects that the occupancy rate of the Grade A office in the six core business districts will remain at approximately 95% by

126 INDUSTRY OVERVIEW Project Name (1) Future Grade A Office Supply in Beijing District Completion Year (2) Approximate GFA available for lease (3) (sq.m.) World Profit Centre... Lufthansa ,957 Fortune Capital International Centre... Financial Street ,557 Fortune Financial Centre... CBD ,000 Ocean International Center II... CBD ,633 Sub-total ,147 Raycom Info. Tech Park B... Zhongguancun ,000 Sub-total... 58,000 Financial Street E6 Plot... Financial Street ,740 Guoson Centre... East 2nd Ring Road ,000 Beijing POSCO Centre... Others ,000 LSH Plaza II... Others ,000 World Profit Centre II... Lufthansa ,000 Emperor Chang an Avenue Project... East Chang an Avenue ,000 Aether Square... CBD ,846 Sub-total ,586 Air China Plaza II... Lufthansa ,000 Huadu Hotel Redevelopment... Lufthansa ,000 One Indigo 2... Others ,000 Sub-total ,000 Total... 1,100,733 Notes: (1) Does not include those projects with self-occupation area greater than 50% of the project s total office GFA. (2) Completion Year refers to the year when construction of a building is completed and ready for occupation. (3) Estimated GFA available for lease after deducting self-occupied GFA, where applicable. Data Source: DTZ Consulting, March 2013 Beijing Grade A office rental levels experienced an average annual rental growth of 14.4% in the past five years from 2008 to DTZ anticipates that the supply of office market in Beijing will remain tight until at least 2017 given that there is limited new supply in the coming few years, and that this scarcity of quality office buildings will further increase rental levels, especially in prime business districts such as the CBD and Financial Street. DTZ estimates that Beijing Grade A office rental levels will continue to grow by 5.0%, 8.0%, 5.0% and 5.0% in 2013, 2014, 2015 and 2016, respectively. Therefore, DTZ anticipates that the monthly effective rent per sq.m. of Beijing Grade A offices will reach RMB309.2, RMB334.0, RMB350.7 and RMB368.2 in 2013, 2014, 2015 and 2016, respectively. 119

127 INDUSTRY OVERVIEW Beijing Grade A Office Rent Forecast 2013F 2014F 2015F 2016F Effective Rent (RMB/sq.m./month) Indicative Transacted Rent (RMB/sq.m./month) Annual Growth Rate (%) Data Source: DTZ Consulting, March 2013 Grade A Office in the CBD Submarket Overview As one of the six core business districts in Beijing, the CBD has developed a mature business function and environment over the past 10 years and it is still at an expansion and development stage. The CBD is the mainstay of the international finance industry, cultural media industry and modern business service industry in Beijing. The CBD is traditionally a hub for international business and activities. By the end of 2011, the CBD was home to 160 Fortune 500 companies, 252 international financial institutions, 50 international headquarters and 200 international business service companies. In addition, approximately 50% of Beijing s Grade A offices and hotels are located in the CBD. The majority of Grade A offices are located along East Third Ring Road and Jianguo Road. The concentration of office buildings along these roads has resulted in heavy traffic congestion around Guomao Bridge and Guanghua Bridge. China Central Place is located in the eastern corner of the traditional CBD and as such, enjoys better traffic conditions. On May 25, 2009, the Beijing CBD Committee announced the East Expansion Plan for the CBD district. According to this plan, the east boundary of the CBD will be expanded to the East Fourth Ring Road, and the total site area of the CBD will be increased from 3.99 sq.km. to 6.99 sq.km. over the next 10 years. Based on the East Expansion Plan, China Central Place is located at the border between the existing and expanded CBD. CBD Submarket Expansion Plan Data Source: DTZ Consulting 120

128 INDUSTRY OVERVIEW Supply, Demand and Rent The new supply of Grade A office buildings in the CBD submarket is relatively small in comparison with its total stock over the past six years due to land scarcity. No new supply entered the market in the first quarter of The stock of Grade A office in the CBD submarket exceeded 2.4 million sq.m. by the end of the first quarter of 2013, representing 36.4% of Beijing s total Grade A office stock. Supply, Demand and Occupancy of Grade A Office in the CBD Submarket Sq.m., GFA 600, , , , , , Q New Supply Net Absorption Occupancy Rate 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Data Source: DTZ Consulting, March 2013 Total net absorption from 2007 to the first quarter of 2013 was 1,514,686 sq.m., which exceeded the total new supply in the same period of 1,505,442 sq.m., reflecting a healthy demand and supply situation. After years of development, the CBD has become one of the most popular business districts in Beijing and attracts many multinational corporations. As of the first quarter of 2013, the occupancy rate was 97.3%. Office rental levels in the CBD continued to be higher than the citywide average. By the end of the first quarter of 2013, the effective rent of Grade A offices in the CBD was RMB333.3 per sq.m. per month, which is 11.7% higher than that of the citywide average. 121

129 INDUSTRY OVERVIEW The strong demand for Grade A office and general shortage of new supply in other business districts have driven up the rental levels in the CBD submarket in the past few years. Grade A Office Rental, CBD Submarket RMB/sq.m./month Q City Average CBD Data Source: DTZ Consulting, March 2013 Supply and Rental Forecast DTZ expects that there will be a limited supply of Grade A office buildings in the CBD submarket from 2013 to 2016 and that there will be no supply of Premium Grade offices in this submarket in the next two years, given that potentially qualifying office buildings will not be regarded as Premium Grade in the market until they have established themselves for at least one to two years after completion. The new Zhongfu Parcel is the last remaining plot for new office property development in the CBD. Given the relatively slow pace of the construction progress at this plot, DTZ expects the majority of the new supply from this area will enter into the market from late Given the limited supply in the CBD submarket and its leading position in office take-up, DTZ estimates the occupancy rate in the CBD submarket will remain high at around 97% from 2013 to Project Name Future Supply of Grade A Office Buildings in the CBD Submarket District Completion Year Estimated Available GFA for Lease (sq.m.) Fortune Financial Centre... CBD ,000 Ocean International Center II... CBD ,633 Aether Square... CBD ,846 Total ,479 Data Source: DTZ Consulting, March 2013 Taking into consideration the future supply, future market conditions, domestic and global economic movements, inflation rates and other influential factors, DTZ expects that the monthly effective rent per sq.m. in the CBD submarket will reach RMB341.8, RMB372.5, RMB391.2 and RMB410.7 in 2013, 2014, 2015 and 2016 respectively. 122

130 INDUSTRY OVERVIEW Rental Forecast of Grade A Office Buildings in the CBD Submarket 2013F 2014F 2015F 2016F Effective Rent (RMB/sq.m./month) Indicative Transacted Rent (RMB/sq.m./month) Annual Growth Rate (%) Data Source: DTZ Consulting, March 2013 Premium Grade Offices Among the Grade A office buildings in Beijing, there are only 13 office buildings (with a total GFA of approximately 1.0 million sq.m.) which could be classified as Premium Grade according to DTZ s definition, of which 10 office buildings (with a total GFA of approximately 855,349 sq.m.), including the Property, are located in the CBD. The other Premium Grade office buildings are located in Financial Street (3 Winland International Financial Centre and Excel Plaza) and Zhongguancun (Raycom Infotech Park C). A Premium Grade office building is distinguished from a general Grade A office building by a number of features, most importantly those relating to location, the supply of car parking spaces, building quality and standard of finish, provision and service of elevators and single ownership and lease only. In addition, it is expected that these existing Premium Grade office buildings will remain popular in the market in the coming few years due to the scarcity of such office building types. According to DTZ, the Property is commonly believed to be one of the top five Premium Grade offices in Beijing. Location Distribution of Grade A and Premium Grade Office Buildings in the CBD Submarket Data Source: DTZ Consulting, March 2013 Notes: (1) Office buildings shown in the table and those marked as circles on the map are Premium Grade office buildings by DTZ s definition. The rest (marked as diamond shape) are general Grade A office buildings. (2) Zhongfu Parcel is the only large scale land supply in the CBD submarket in recent years and it is anticipated that the majority of the new supply from this parcel will not enter the market until